President Trump has shifted the axis of US foreign policy since his return to power just one month ago. Any remaining ambiguity on this issue for Europeans was stripped away by US Defence Secretary Hegseth last week with his remarks that Washington would 'no longer tolerate an imbalanced relationship' and that 'safeguarding European security must be an imperative for European members of Nato', Rabobank's FX analyst Jane Foley notes.
Fresh headwinds to growth can weigh on the outlook for the EUR
"To drive this point home, Hegseth made clear the US’ expectation that 'Europe must provide the overwhelming share of future lethal and non-lethal aid to Ukraine.' Since then European politicians have been scrambling to respond. Extra spending on defence will be expensive. Fresh headwinds to growth and weakened budgets could weigh on the outlook for the EUR."
"That said, as pointed out by former ECB President Draghi in his essay in the FT last week, many of the existing headwinds facing the Eurozone economy are of its own making. Crucially, Draghi argues that Europe also has the ability to lead itself out of its current predicament if it is prepared to undergo radical change. How European politicians respond to the challenges they currently face could be key in determining the long-term coherence of the Eurozone project and the EUR."
"For now we would argue that with Europe currently unable to match the US in terms of growth and with its leadership position on the world stage undermined by its weak position on defence, that the EUR will struggle to launch a sustained and significant recovery vs the USD near-term. We continue to see risk of a move to EUR/USD parity around the middle of the year."
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