Not many months ago, the foreign exchange market was anticipating a much weaker euro - perhaps at parity to the U.S. dollar or below parity. 

All the ingredients were in place for a weaker euro, with expectations of more rate hikes by the U.S. Federal Reserve versus the European Central Bank's continuing monetary accommodation. 

Fears of a potential Eurozone break-up were also lingering, especially before the French elections. So market participants were short euros, along with many currencies, and were quite content to hold those positions based on what we knew at the time. 

But parity never happened. And in recent weeks that sentiment seems to have lost steam.

  • The market shift started in the U.S., when plans to amend the Affordable Care Act failed. 
  • Then there was White House chatter about the U.S. dollar being “too strong." That caused many euro short positions to square up. 
  • Last weekend, the results of the French primary election really took the burden off the shoulders of the euro "bears."

Of course, we are all waiting for the results of the French run-off election on May 7. But the market is already wiping out the uncertainty about a Eurozone break up in the wake of the first round of the French elections. 

The U.S. dollar was stronger beginning in November of last year, when Donald Trump was elected president. But that trend has recently reversed. 

Market psychology and positioning reflect these new developments. Market bears have given up their forecasts for a much weaker euro and now see a steady to slightly stronger euro going forward. Eurozone growth continues to improve and is close to outpacing U.S. growth

While the market still anticipates the U.S. Fed raising interest rates two more times this year, the market is now anticipating that the ECB will begin to lay the groundwork for eventual tapering and higher Eurozone interest rates - most likely next year.

Our View: From here, it seems as if market dynamics favor a steady, range-bound euro. For the U.S. dollar to regain its footing further, White House initiatives regarding tax reform and another try at amending the ACA will need to gain more traction. If not, then euro bulls could be seeing a stronger euro for quite some time going forward.

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.