EUR/USD: Forecasts for a higher euro revised after coronavirus – MUFG

Analysts at MUFG Bank, forecast the EUR/USD pair will trade in the range 1.0800/1.1300 during the first quarter, around 1.1200 in the second quarter and 1.14 in the fourth. 

Key Quotes:

“Our basic premise for a modestly higher EUR/USD rate this year based on a relatively better macro backdrop for the euro-zone versus the US than in 2018 or 2019 was undermined in January by the escalation of downside risks to global growth from the spreading of the coronavirus.”

“With economic activity in China and Asia threatened over the short-term, the importance of exports to the region for Germany meant the euro suffered. It’s impossible to predict the outcome of this risk but at the time of writing it clearly looks serious enough to warrant some global growth adjustments to the downside and hence with it some lowering of our Q1 and Q2 EUR/USD forecasts.”

“Most business sentiment indicators (but not IFO) revealed an upturn in sentiment and this was evident globally too suggesting a turnaround in a near two-year global manufacturing downturn. We believe that will have positive implications for the euro if it continues to unfold.”

“We do not expect as much from the ECB review as we may get from the Fed’s review with some form of change in definition of price stability to make it more symmetrical a likely outcome.”

“We still expect changes from the European Commission that may potentially result in a more flexible approach to fiscal policy. The Commission is expected to publish a document in February that highlights problems with the current fiscal framework. The potential for looser fiscal policy plus some modest pick-up in growth should help provide EUR with better support in 2020.”