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The Fed’s policy combined with Danske Bank’s expectations of global macro means EUR/USD is likely to trade in the 1.18-1.20 range with risks tilted to the upside, especially on a three-month horizon.

Key quotes

“The implications of FAIT are not obvious as relative inflation has not directly been a relevant factor in the cross for many years. But, the new policy is implicitly EUR positive, as the US is effectively exporting easy financial conditions to the rest of the world. Rising global inflation expectations also suppress debt-deflation and political risks, which are particularly prominent in the eurozone. If the Fed succeeds in strengthening global demand, it will thus also find its way to EUR/USD indirectly.”

“Near-term, the focus for the pair turns to the September FOMC meeting, global economic activity, the value versus growth rotation in equity markets and the potential for further US fiscal easing. These factors may shift EUR/USD around from day-to-day, but it is quite hard to see a shift to substantial USD appreciation on a three-month horizon.” 

“A key thing to keep in mind is that we now see a rise in the broad EUR as weighing somewhat on European equity markets. This may make the ECB reflect and verbally try to intervene against excessively rapid appreciation. In addition, the still somewhat-slow pace of the global economic recovery limits the potential for near-term EUR appreciation. So, 1.25 is likely not in sight right now.” 

“Looking further ahead, Europe still has an ample supply of internal problems that are likely to matter on a twelve-month horizon, but these EUR negatives can easily be overshadowed by a renewed pick-up in global market sentiment for the time being.”


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