The euro looks set to put a pause its post-U.S. election drop.
“If the [euro] doesn’t sell off on bad news, I think it’s telling us something. I think it’s going to correct higher,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
The euro was near $1.072 on Monday, following a drop to a 20-month low of $1.0503 against the dollar overnight after Italians voted down a referendum that would have changed how their parliament works.
Euro/USD quarter-to-date performance
Now that the euro had crossed back above $1.0725, Chandler said it could reach $1.08 or $1.085.
However, that level is still weaker than Election Day, when the euro was near $1.13. Longer-term, Chandler and many currency strategists still expect the euro to reach a one-to-one exchange rate with the U.S. dollar. They said the greenback looks set to strengthen on the back of better U.S. economic growth and higher U.S. interest rates from the Federal Reserve.
Jason Leinwand, founder and CEO of currency trading advisory firm FirstLine FX, said the euro bounced back overnight since “a lot of people were well-positioned” for the “no” vote.
“I still think the euro trades lower into the year-end as people sift through what’s happening in Italy,” he said.
Italy’s Prime Minister Matteo Renzi was set to resign as early as Monday, increasing uncertainty around the country’s government and its banks. Italy’s financial institutions have struggled with a large level of bad loans that many fear could cause trouble for the European financial system.
Currency traders on Monday were waiting for the European Central Bank’s scheduled Thursday press conference on monetary policy. Analysts expect the ECB to announce an extension of its asset purchase program, which is designed to get more money circulating in the economy.
The euro “should be weakening on the back of the premise the ECB is going to ease (monetary policy) further,” said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie. He expects the euro to reach parity with the dollar next year, and attributed some of the euro’s Monday morning strength to traders who are covering bad bets against the currency.
To be sure, some strategists said the euro may not reach parity with the dollar at all in the near future.
UBS has expected the euro to strengthen against the dollar, and on Monday reaffirmed its forecast for the euro to reach $1.12 in the next three months and $1.20 in the next 12 months.
“We think the Federal Reserve is going to stay behind the curve,” said Max Kunkel, investment strategist at UBS Wealth Management. He also said he expects increased government spending to increase the U.S. current account deficit, which would limit dollar strength and allow the euro to recover.