After a marathon weekend, press reports suggest a deal on the European recovery fund is fast approaching. Economists at Deutsche Bank expect the market to move on and focus on data divergence between the EU and the US. They forecast EUR/USD at 1.20 in coming months.
Key quotes
“What matters in the near-term is that the market perceives the ECB backstop to be intact and that European break-up risk remains low. The deal achieves both. A strengthening of Italian political stability together with an application for ESM support would be the best case scenario in coming weeks.”
“A European deal is a necessary but not sufficient condition for a stronger euro. But in our view the euro higher trade for coming months is all about divergence and whether European growth outperforms the US plays in coming months, encouraging more portfolio inflows. High-frequency indicators such as restaurant visits suggest that this divergence is accelerating. Our high-frequency equity flow monitor continues to perk up.”
“Bottom line, the market will very quickly shift focus away from the Recovery Fund. As European leaders and market participants attempt to go on a summer holiday, it will be data divergence and portfolio inflows into Europe that drive EUR/USD higher in coming weeks and months. We remain bullish targeting 1.20.”
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