EUR/USD: Downside risks for euro have eased, but upside potential remains limited for now – MUFG

Analysts at MUFG Bank, point out the Eurozone economy is beginning to pick-up, but hey warn the outlook remains highly uncertain. They see the downside risks for the euro have eased, but at the same time, limited upside potential for now.

Key Quotes:

“EUR/USD attempted and failed to break above the 1.1000-level in recent days amidst the broadening USD sell off. It takes the pair back towards the middle of 1.0800 to 1.1200 trading range that has been in place for the majority of the time since last summer. Even more notable has been the EUR’s advance against both the CHF and JPY. It is the largest move higher for EUR/CHF since last November. Spot price action has triggered some excitement that the EUR is at a turning point. Demand for EUR/USD downside protection in the options market has also eased especially covering the next three months.”

“There are two main drivers providing more support for the EUR in the near-term. Firstly, there is building optimism that the euro-zone economy is through the worst of the COVID-19 crisis. (…) Secondly and more importantly has been the Franco-German proposal for an EU Recovery Fund.”

“We are not yet convinced that the EUR is set strengthen on a more sustained basis against the USD, CHF and JPY like in 2017. While we agree that downside risks for the EUR have eased, upside potential for EUR/USD should remain limited for now by the top of the 1.0800 to 1.1200 range.”