The European Central Bank (ECB) delivered no surprises today; the phasing out of PEPP purchases was not discussed and the exchange rate comments did not stand out. The euro sailed through the meeting unaffected and the focus now turns to the expected improvement in eurozone data, which should help to push the undervalued EUR/USD higher this quarter, as reported by ING.
More EUR/USD upside to come
“No surprise was delivered and although the outlook is improving, the central bank remains cautious. President Christine Lagarde stressed that there was no discussion on phasing out purchases under the Pandemic Emergency Purchase Programme and the exchange rate comments did not surprise.”
“The EUR/USD uptrend which started this month should remain in place. Plenty of bad news has now been priced into the euro, the currency has been trading with a persistent risk premium over the past few months and despite the recent rise, EUR/USD still screens cheap based on our short-term financial fair value model (by around 1.5%).”
“The eurozone economic data is likely to pick up in coming months as the pace of vaccination increases. Improving eurozone data should translate into some upside for the euro. Equally important, the dollar strength observed during the first quarter of this year appears to be fading and the currency is no longer reacting positively to solid US data points. This suggests that plenty of good news is already priced into the dollar, and coupled with the Federal Reserve presiding over deeply negative front-end US real rates, this should weigh on the currency.”
“We expect the EUR/USD pair to reach and break the 1.25 level this summer.”