Analysts at Danske Bank are revising lower their EUR/USD forecast profile as a hesitant ECB and USD carry will keep the cross lower for longer, but they think that the next big move remains higher though.
Key Quotes
“We now see limited upside potential on a 6M horizon, which makes risk reversals attractive relative to forwards for hedging USD income/assets at this horizon.”
“What has changed?
ECB. While the ECB remains in a process of policy ‘normalisation’, we stress that Mario Draghi and co are set to stay reactive rather than proactive when it comes to taking the next steps. Amid recent weakness both economically (activity data) and politically (Italy and trade), we doubt the ECB will want to rush to announce an end to QE next week; this should serve to halt the recent rally in EUR/USD. Indeed, market pricing of the ECB has, in our view, become too hawkish, with a first 10bp set for July 2019 (we look for December). This said, hawkish hints at the press conference should retain market faith that the ECB is slowly but surely heading to the ‘exit’; in our view, this will serve to keep the euro afloat.”
“Carry. A recoupling between EUR/USD and relative rates has clearly been seen periodically of late. Indeed, the carry on long USD positions (notably vs EUR) appears to have reached a threshold where this is in itself a reason to buy the dollar. Further, our rate strategists have revised lower their forecasts for euro area vs US rates relative to market expectations especially for the near term. As we deem the rates recoupling is more permanent due to the rise of the USD as a ‘carry’ currency, this in combination points to USD support for longer, everything else equal.”
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