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According to analysts from Danske Bank, a EUR/USD appreciation on the medium to long-term is on the agenda, driven by an European Central Bank initiating its cycle, euro-zone capital outflows fading and a strong valuation.

Key Quotes:  

“The US economy has recently proved that it is still going strong. While we still look for some loss of momentum into 2019, fiscal tailwinds remain. Meanwhile euro-zone data has come out a tad on the weaker side lately, putting the outlook for a shift in favour of a higher EUR/USD on hold. The Fed delivered the widely expected 25bp hike in September and will most likely deliver another in December. The outlook for relative rates is thus still tilted in favour of a lower EUR/USD near term.”

“The US-led trade war will linger as a USD driver ahead of the US midterm elections. We also note the small but non-negligible risk that the Trump administration could opt for intervention to weaken USD as a ‘quick fix’ to the current-account deficit and/or in case of a faltering growth outlook.”

“The strong US economy will keep the Fed in the hiking game for now and add to the carry support to USD – not withstanding recent Trump calls for slowing the pace of tightening. Coupled with the risk of setbacks on Italy and Brexit negotiations, this should leave EUR/USD in a range around 1.15 on a 3M horizon. Medium term, the euro capital outflows of recent years will fade as the first ECB hike draws closer. Alongside valuation, this is set to support EUR/USD in 6-12M. We see EUR/USD at 1.15 in 1M, 1.15 in 3M, 1.18in 6M, and 1.25 in 12M.”