EUR/USD topside is muted by politics and macro. The pair is set to remain in the 1.15-1.19 interval and economists at Danske Bank still forecast euro/dollar at 1.17 on a one-month view. Brexit, US election and the EU budget may culminate in December to move the forecsat to 1.20.
Key quotes
“EUR/USD topside risk is fading as markets have downgraded their expectations about the European recovery. Spot has shifted from 1.20 to 1.17, European equities are moving sideways and short-term market rates have moved below ECB’s deposit rate. This is in line with our one-month forecast of 1.17 and we expect range trading to continue at 1.15-1.19.”
“European COVID-19 data continue to appear EUR-negative and new measures of containment are being taken across EU. This will likely affect net savings by weighing on consumption and investment decisions and weakness is already to be found in credit data. Such measures are at odds with the consensus narrative and a strong EUR.” “Ratifying the EU budget (MFF) has hit a stalemate. The Eastern European countries (primarily Poland) are locked in conflict with EU over the terms of fiscal support in 2021. This conflict may postpone the payments of EU funds to H2 21 and thus delay the recovery. Eventually, the budget should pass, but it is a dent to the consensus story of a coherent EU policy environment. The next European council meeting is on 10-11 December.”
“The value rotation never came. This should gradually mean a reversal in favour of USD, as hedging levels are to move lower and capital flows back from EU to US in 2021.”
“A Brexit solution, a Biden win and an EU budget agreement may culminate in December to move EUR/USD to 1.20, which remains our best (and base) case scenario. There is a risk we are too optimistic and if we do not see improvements over December, we expect to shift our one-to-twelve month profile (currently 1.20 on six-month) in favour of USD.”
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