12.01.201702:31:00UTC+00Near-Term Risks for Euro Continue to be on Downside, says Lloyds Bank

As the instalment of Gentilono as Italy�s new Prime Minister last month has moved Europe�s spotlight away from Italy, an early general elections continues to be a strong likelihood. Furthermore, with elections in Germany, France and the Netherlands scheduled in the coming year, politics in Europe is expected to be a main source of downside risk for the euro, noted Lloyds Bank in a research report. Moreover, given an extended period of ECB quantitative easing and a stable rise in U.S. interest rates, the line of least resistant is for the euro to depreciate further.
However, most of this is already factored in and in the absence of an additional aggressive rate of tightening by the Fed or a steeper rise in European political risk, a break in EUR/USD below parity appears unlikely, stated Lloyds Bank. The risks for the euro continue to be on the downside for the time being, but in the medium to longer term, the euro seems to be oversold. Fundamental estimates of fair value for the EUR/USD pair centre around 1.20, added Lloyds Bank.
However, it is expected to take a sustained increase in �core� euro area inflation, a subsidence in political risk, stronger signs of economic recovery and an associated narrowing in the U.S. and euro area rate spreads to push the euro significantly higher, noted Lloyds Bank.