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Foreign exchange strategists at two prominent European investment banks are eyeing imminent downside in the Euro-to-Dollar exchange rate, saying downside risks are manifesting for the single-currency.

Marvin Barth, a foreign exchange strategist at Barclays in London recommends to sell the Euro against the Dollar following an accumulation of evidence that European economic upside is limited.

Furthermore, the upside on the return that can be expected from European investments is also limited, all while risks to European assets are seen to be worsening sharply.

Jane Foley, a strategist with Rabobank, also in London, has meanwhile drawn up a list of reasons to believe the single-currency is going lower, citing in particular the risk of policy uncertainty emerging out of the European Parliament's May elections, which should see the old-guard centre parties lose ground to populist newcomers.

Barclays say there has been a complete reversal of those developments that boosted the run higher at the end of 2016, which saw the EUR/USD exchange rate rally to 1.25 in early 2018.

Risk-adjusted relative returns of Euro Area assets formed the foundations of the Euro's 2016-2018 rally says Barth. Those positive drivers that have now reversed include:

1) Strong 2019 growth which raised expected absolute returns on Euro assets

2) Economic growth that alleviated concerns about peripheral country debt

3) The perceptions that political risks in the Euro Area were fading.

The positive forces driving the Euro higher have since reversed owing to a "surprising slowdown" in economic activity, excessive export dependence in a time of global trade frictions, worsening public finances in Italy and sustained gains by populist parties across Europe while spillover effects from Brexit are also seen weighing.

"We expect EUR/USD to decisively break its four-month 1.12-1.15 range to the downside in coming weeks, if not days," says Barclays' Barth in a note to clients dated February 18.

In December Barclays forecast that EUR/USD would range trade this year between 1.10 and 1.14 and this recommendation is based on "what we see as increasing downside risks to our EUR/USD forecasts."

Barclays recommend selling EUR/USD at 1.1310, targeting a move to 1.0889, saying technical signals are likely to catalyse FX action.

Jane Foley at Rabobank meanwhile says the U.S. Dollar's outperformance over coming months must be accounted for, saying she expects the Greenback to "remain relatively well bid vs. a basket of currencies on safe demand despite the fact that we are anticipating a significant weakening of activity levels in the U.S. next year."

The Dollar should remain particularly bid against the Euro "given that the EUR is faced with its own share of domestic economic and political risk".

"It is not just changing markets views with respect to ECB policy which could serve to undermine the EUR in the weeks ahead. Spanish politics is again in a state of upheaval. It seems likely that after the next general election a more hard line approach towards Catalan Separatists will be taken, this suggests risk of a rise in tensions," says Foley.

The Rabobank strategist believes politically-induced uncertainty will run into, and after May, thanks to the European Parliamentary elections.

The elections are expected to see populists winning a greater share of votes and encourage a sense of disharmony across the region.

"The freshly election European parliament will have to approve a new European Commissioner by the end of October. In addition it could over time have an influence on the stance the region takes on area such at the EU budget and trade policy," says Foley.

Furthermore, a replacement will have to be found for ECB President Draghi this year.

"We continue to see scope for EUR/USD to dip back to the 1.12 area on a 3 month view," says Foley.

Spain’s prime minister, Pedro Sánchez, last week called a snap election for April 28 after Catalan secessionists joined rightwing parties in rejecting the socialist government’s national budget earlier in the week.

The move kicks off a season of political risk for the Euro.

Spain's third general election in less than four years was seen as an inevitability following Sánchez’s defeat last Wednesday and will force investors to start pricing a political risk premium into European assets, including its currency.

The Euro was seen under pressure amidst the headlines with the Pound-to-Euro exchange rate climbing 0.4% to 1.1371 and the Euro-Dollar exchange rate falling 0.13% down to 1.1279.

"I expect the Euro to start weakening, and the spreads to start widening versus the bunds,” says the CEO of ABP in an interview with Bloomberg News. "The area which I think the market is underpricing is the risk of ‘Europe’. I believe that power is going to be moving away from Brussels over the next decade back into the national areas with Merkel and Draghi not there to control and drive the centre. I believe the parliamentary elections in May are going to be vitriolic in terms of politics - we have already seen a little bit of that in the spat between France and Italy.”

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