EUR/USD managed to bounce off support at 1.0710 but it is already making attempts to move lower. The team at Barclays sees two reasons for further drops:
Here is their view, courtesy of eFXnews:
EURUSD weakness following the US election should persist through out this week and reflects two factors: i) Widening US-EA interest rate differentials; and ii) increased euro area political risk premia.
EA-US 2-year interest rate differentials declined almost 10bp last week as the market priced higher US inflation and tighter Fed policy under a Trump Presidency. A combination of more expansionary fiscal policy, import tariffs and lower labour supply growth should place upward pressure on US inflation.
For the EUR, we think Trump’s victory is another example of the Politics of Rage, to which the EA is particularly vulnerable. As such, we think EUR political risk premium has increased following with EURUSD implied volatility increasing by a larger amount than GBPUSD implied volatility, for example. This risk premium is likely to grow over the coming year amid a very busy European political calendar (see Figure 6).
EU members are among the highest risk on our index of political rage and are most exposed to the two most demanded ‘Policies of Rage’: sovereignty and representative reform.
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