Immediate economic recovery in the US is stronger than Europe but from 2021, Europe should begin to catch up on fiscal aid and trade. The euro should rise over the period as a result with EUR/USD set to reach the 1.21 by year-end.
Key quotes
“The revisions to our growth forecasts for the US and Euro Area this month highlight that momentum has accelerated more quickly in the US. A month ago we forecast 2020 year-average growth of -6.8% for the US. Now that forecast sits at -4.7%. Our comparable forecast for the Euro Area has been revised more modestly, from -8.5% to -7.6%.”
“The foundation for sustained fiscal stimulus in the Euro Area is stronger than the US, and the incidence of COVID-19 still materially lower in Europe. Further, the Euro Area has to be expected to benefit more from a global recovery in investment and consumption given the strength and breadth of their export sector. For these reasons, 2021 growth for the Euro Area has been revised up more meaningfully than in the US, to 5.4% and 3.4% respectively.”
“We have to expect that the euro will not only take back ground lost recently, but also extend these gains as the global recovery builds. Our central expectation is that EUR/USD will rise from 1.18 currently to 1.21 at the end of 2020 and then to 1.25 in late-2021, a level that should prove sustainable in 2022.”
“Supportive of this trend is the determination of the US’ FOMC to target PCE inflation materially above 2.0% for a time, to average consumer price growth at that level over the cycle. All else equal, this implies that central bank asset purchases are likely to be greater in the US than Europe in coming years.”
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