Eurozone: Politics posing questions to EUR bulls - ING

Political events in Germany and Spain over the past few weeks have provided a reality check on the way investors view EZ political risks, according to analysts at ING.

Key Quotes

“Since the French elections, we’ve noted that the EUR may have been playing the role of a ‘political haven’ – especially when taking stock of the political risks plaguing the likes of other G4 currencies (namely USD and GBP). However, the return of the ‘populist voter’ sentiment is a reminder that political risks haven't completely abated for the euro – especially with the spectre of the possibly more contentious Italian elections looming in early 2018. This may be more of a concern for medium-term real money investors (eg, reserve managers), though any fading EZ recovery sentiment could also see a pause in the cyclical EUR upswing.”

“We note that the ECB policy normalisation story provides a backstop to the EUR. Unlike prior occasions when European political risks have flared, we now have the tailwind of an ECB looking to tighten – or normalise – monetary policy. This should keep EUR/USD supported around 1.17 - although a break of this could see a deeper technical correction towards 1.15-1.16.”

“Majors: Getting political... again!

Political woes in Europe have provided a reality check on the EUR rally, with the USD finding broad support amid Dec Fed rate hike and GOP tax plan noise. Politics also remains in the spotlight for GBP and JPY.”