EUR/USD: fundamental adjustment towards 1.25-1.30 seems to be underway - Danske Bank
Analysts from Danske Bank do not expect the next uptick in EUR/USD until Q2 18 but at the same time, they see that the fundamental adjustment toward higher levels seems to be underway.
Key Quotes:
“Even though the ECB is expected to keep interest rates unchanged until sometime in 2019, the EUR has seen a strong start to 2018. The fundamental adjustment towards 1.25-1.30 we have signalled for a while thus seems to be underway. We target the cross at 1.20 in 1M, 1.20 in 3M, 1.23 in 6M and 1.28 in 12M.”
“Both US and Eurozone economic releases have continued to surprise on the upside. That said, Eurozone data have seen increasing trouble in keeping up with now high expectations, whereas US data have kept up momentum better in this respect. Our quantitative business-cycle models suggest the US enters the year on a stronger footing than the Eurozone, which spells some cyclical downside to EUR/USD near term.”
“The ECB, as expected, kept policy measures and guidance unchanged in December, but the meeting minutes came across as surprisingly hawkish. A first ECB hike is priced for Q1 next year, which we think is too early, and we expect ECB president Draghi to strike a dovish tone to counter such expectations at the January meeting. At the same time, we see an increasing risk that the Fed could hike as early as March. This could imply a temporary revival for rates to support the USD.”
“While we do not expect the next uptick in EUR/USD until Q2 18, we emphasise that the potential for relative rates, valuation and flows to support the cross is clearly in place. Momentum is strong at present and looks increasingly reminiscent of last summer’s rally. That said, in our view the market interpretation of the minutes is not entirely ‘fair’ and we expect a softer tone at the January ECB meeting alongside the risk of a near-term Fed hike to weigh a tad on the cross. However, we no longer expect a sustained dip below 1.20 and have upped our forecast profile.”