Just before the end of last year it seemed markets had reverted to a pre-crisis mood involving limited activity and low volatility. All this seems a distant memory: 1) Japan has successfully depreciated the overvalued yen, a policy likely to be continued by BOJ governor-designate Kuroda; 2) Last Friday, Moody’s downgraded UK AAA–rated debt due to the seemingly never-ending negative GBP outlook; 3) In his Humphrey-Hawkins address due later today, US Fed chief Bernanke is likely to reiterate his view that QE3 should continue, a USD negative factor (see page 8); and last but certainly not least 4): the Italian general election has once again shown the extreme unpopularity of current European austerity policies. As the Italian election is likely to end in a hung parliament, political uncertainties will linger during the coming weeks. Rising political risks are the core assumptions of why we see more broad-based euro weakness during the second half of 2013. The Italian election will probably make long-term investors less likely to purchasing eurodenominated assets given the timely reminder of underlying problems in the euro-zone (portfolio flows have been rising steadily since the introduction of the OMT-program). Rising political risks already now make us revise lower our EUR/USD forecasts cautiously keeping the profile intact of a gradually weaker euro during H2 2013. In addition, next year, the Fed will reduce its buying activity and/or completely stop QE3, though European political risks will certainly continue. Hence 2014 provides a clearer picture and room for a lower EUR/USD.
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