According to analysts from Danske Bank, the EUR/USD will likely fall further in coming days following today’s ECB meeting that introduced a “easing risk premium” on the euro.
“In light of the very soft ECB message, the fall in EUR/USD from just above the 1.13 mark before the announcement to briefly below 1.1250 was not as large as this significantly dovish package warrants in our view. Indeed, we would expect to see the cross slide further in coming days.”
“We have previously stressed that prospects for the end of ECB-Fed policy divergence this year held the potential for a sustained uptick in EUR/USD towards the end of the year, i.e. that an end to Fed hikes, a US-China trade deal and a first ECB hike would, in combination, take the cross towards 1.25 in 12M. The latter driver is now effectively taken out of the equation, with this not in sight on a 12M horizon.”
“Indeed, the ECB’s communication today highlights that all policy options are back on the table and – crucially for the FX market – this opens up the range of possible policy outcomes and introduces an ‘ECB easing risk premium’. Importantly, it also postpones the potential for a capital-flow reversal to support EUR, as negative rates will rein in the eurozone for some time still.”
“Near term, we expect EUR/USD to drift below the 1.12 mark – watch out for 1.1216 (2018 low) resistance and 1.1179 (27-Jun-17 low) thereafter. With the risk of pockets of USD strength from renewed pricing of Fed hikes and a trade deal that will not provide much imminent support, this opens the possibility for a EUR/USD move towards 1.10 on a 3M horizon. Over the medium term (3-6M out), we expect EUR/USD to stabilise and move back into the 1.12-1.16 range and stress that any drift higher will be limited, with any upside deriving mainly from positive spillover to the euro area from a turn in the global (China) cycle.”