The first quarter of 2017 in the Eurozone will be marked by political changes that will cloud the European economic outlook. Major changes can be expected with the big question on whether the already fragile economic growth and the European Central Bank’s stimulus programs will be overtaken by populist politics that could threaten to break up the economic union.
With the European Central Bank expressing its willingness to pursue easy monetary policies, equity markets in Europe could see another strong year as long as the current wave of anti-EU populist parties that have grown in popularity over the past year will fail to convert into an election victory. However, there are serious risks that the anti-EU parties could triumph in the upcoming elections which heighten the prospects of a breakup in the eurozone.
Monetary policy divergence between the Fed and the ECB
On the economic front, the central bank monetary policy divergence between the Federal Reserve and the European Central Bank will continue which could keep the euro subdued against the U.S. dollar. Market participants expect the U.S. Federal Reserve to continue to hike rates in 2017, with the Fed signaling at least three rate hikes this year. Meanwhile, the European Central Bank, at its meeting in December 2016 announced that it would extend its QE purchase program (albeit at a smaller quantity) into 2017.
The monetary policy divergence has sent the euro to one of its lowest levels against the U.S. dollar, last seen in 2003. EURUSD fell to $1.0352 briefly before pushing back higher. On a yearly basis, EURUSD is down 3.1% while the single currency has fallen 8.8% since it peaked against the U.S. dollar in May, closing out the year at $1.0519.
EURUSD (1.0519), 30/12/2016
A weaker euro is essential and is in the best interest of the eurozone’s economy. A moderate pace of economic growth alongside a stronger performance from the banking sector is essentially a win-win situation for investors, especially for those who remain optimistic despite the recent political turbulence. However, according to data from the ECB, in 2016, the economy suffered massive outflows. In the first three-quarters along, the euro-area saw net outflows of nearly €405 billion.
