According to analysts at Danske Bank, the Federal Reserve will eventually get ahead of the curve and push EUR/USD higher.
Key Quotes:
“Trade war escalation, geopolitical tensions, a downturn in global manufacturing and slow monetary policy adjustments by the Fed and the ECB are factors weighing on the US and euro area. While the US economy still looks relatively stronger, we consider a period of stabilisation around current weaker levels as more likely than an imminent turnaround in either economy.”
“The September ECB meeting could turn out to have been a game changer for EUR/USD. Even though the ECB cut its deposit rate less than expected and introduced a tiered deposit system, Draghi and co. Came close to convincing markets of their commitment to easing with their strong forward guidance and an open-ended QE programme. Over time, these actions may support higher inflation expectations which, when viewed in isolation, could weigh on EUR/USD. The Fed cut rates again in September and we look for a 25bp rate cut during each of the next four meetings, which would eventually place the Fed ahead of the curve in terms of monetary easing. For now, however, the Fed remains unwilling to pre-commit.”
“The possibility of more forceful Fed easing in the short term represents a notable upside risk to our forecast. Given the current 50/50 market pricing of a 25bp cut in October, the next releases of ISM and non-farm payrolls will be even more important for EUR/USD in the short term. Ultimately, strong forward guidance from the ECB will give some counterweight to a continuation of Fed rate cuts in the short term. Eventually, we expect the Fed will get ahead of the curve and push EUR/USD higher. We therefore keep our forecasts unchanged at 1.10 in 1M and 3M, 1.13 in 3M and 1.15 in 12M.”
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