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We are past the peak of repricing US exceptionalism, global growth should broaden and the vaccine and growth laggards should bounce back. This should be conducive to a return of broader USD weakness, according to economists at Deutsche Bank who see European currencies as the prime beneficiaries – they forecast EUR/USD breaking 1.25 by September.

Time for the euro to participate in dollar weakness

“Despite the big rise in US yields, the trade-weighted dollar is sitting at the bottom end of a range that has prevailed since 2015. The divergence speaks to extreme macro imbalances – booming consumption but lagging job creation. As a result, the Fed is likely to be the last G10 central bank to taper this year while the US current account deficit continues to deteriorate.”  

“The European outlook is looking favorable. We expect a sizeable bounceback in the relative EU-US PMI differential in coming months. Such inflection points have historically seen EUR/ USD rallies. The euro has shown significant positive non-linearities to the interest rate differential when bund yields turn positive and if the ECB tapers ahead of the Fed, this should further help the euro.”

“The trade-weighted dollar is at a big technical level: the low-end of a range that has prevailed since 2015. The risks are skewed towards a break-out lower. We see EUR/ USD reaching 1.25 over the summer months.”


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