EUR/USD: still higher longer term, but ‘reduced speed’ ahead - Danske Bank

Analysts from Danske Bank expect the EUR/USD pair to remain around current levels in the coming months. They see the European Central Bank as an important driver. 

Key Quotes: 

“US data has made a marked turn for the better in recent months and our quantitative business cycle models suggest that the US economy is set to recover in H2. In contrast, the eurozone has seemingly lost some growth momentum recently and our models suggest this will continue near term. There is renewed optimism regarding the outlook for the eurozone following populist parties losing support.”

“The ECB’s Mario Draghi let the euro out of the bottle when he spoke at the late-June Sintra conference, revealing that the ECB is starting to flirt with exit discussions. While a first 10bp hike from the ECB is priced in a bit early at present (around New Year 2018/19), we stress that what is key for the FX market is the direction in which the ECB is now headed. At the September FOMC meeting, the Fed confirmed that it is likely to move on with both rate hikes (we expect the Fed to hike in December) and balance sheet reduction (QT) which is set to start in October.”

“While the latest uptick in EUR/USD has not been shadowed by relative interest rates, unhedged equity and speculative flows appear to have played a key role. While these flows may be fading near term and a softly priced Fed could provide USD support, we maintain that any dips in EUR/USD should be shallow and short-lived as fundamentals still provide support, and as notably a reversal in debt flows is a key source of upside risks for the cross.”

“We target the cross at 1.19 in 1M, 1.19 in 3M, 1.22 in 6M and 1.25 in 12M.”