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Analysts at CIBC consider that a combination of factors call for a medium bullish run in the euro. The see the EUR/USD pair trading at 1.14 during the third quarter and at 1.15 in the fourth. 

Key Quotes: 

“A notable development from the macro devastation caused by the Covid crisis has been the galvanisation of politicians to look at fixing one of the key deficiencies of the system, namely a lack of fiscal transfers. Although we are not yet considering debt mutualisation, there has been progress on that end. For instance, Germany has come around to the concept of rescue funds largely made up of grants (and not loans only). Furthermore, the German government has left the ‘black zero’ budget policy behind via two significant fiscal expansions, the latter equating to a larger than expected €130bn. Although there has been pushback against the EU’s proposed €750bn rescue plan from the ‘Frugal Four’ (Austria, Denmark, Sweden and the Netherlands), we expect this pushback to dissipate. In part, their opposition could be seen as a negotiating tactic as the rescue fund is being debated in parallel with the new 7 year Multi-Annual Financial Framework (MFF).”

“The combination of a plan advocating joint debt issuance, German fiscal expansion, and the extension of the ECB PEPP programmes underlines our bias towards medium run EUR impetus. While real money longs have extended to levels not seen since May 2018, leveraged investors continue to maintain a modest negative positional skew, leaving room for position adjustment. The risk to our EUR bullish view is if talks on the EU rescue fund breaks down.”