According to analysts from Danske Bank, a move of EUR/USD to 1.20s is warranted by valuation but needs a confirmation that the European Central Bank will raise rates.
Key Quotes:
“ECB’s eagerness to get started was evident today in both Draghi’s upbeat tone despite the downside risks assessment and in the EUR reaction. While EUR/USD initially traded lower during the press conference it still held above the 1.13 mark, even if we did at the same time have the statement from US commerce secretary, Ross, that US and China are far away from each other on trade deal – even if there is a ‘fair’ chance they may eventually reach one – which helped weigh on EUR/USD at first. In the end however, Draghi’s still decently upbeat tone on inflation and his reluctance to commit to new liquidity operations, cemented that ECB remains on course for a hike in the ‘not too distant’ future.”
“EUR/USD still looks like a 1.15 range near term. Indeed, a higher range is now warranted than was the case just a few months by a move higher in EUR-USD real interest-rate spreads as the Fed has arguably largely withdrawn USD support by now.”
“We still think the first hike is a tad too distant/fragile for FX markets to send EUR significantly higher, but as H1 progresses, we expect the next stage in a EUR/USD rebound to reached via a US-China trade deal. Associated CNY appreciation would further help keep the effective EUR from strengthening too much which would in turn pave the way for ECB.”
“For true lift-off in EUR/USD towards the high 1.20s as warranted by valuation, we need to get closer to confirmation that the ECB intends to move on rates – and that will likely not happen until H2, but we are gradually moving in that direction.”
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