EUR/USD: Where next after the Eur-phoria?

EUR/USD seems unstoppable, trading comfortably at the highest levels in nearly 14 months above 1.14. What’s next? Here are two opinions:

Here is their view, courtesy of eFXnews:

EUR: What Has Changed? Where To From Here? – Danske

Danske Bank FX Strategy Research notes that recent ECB communication topped by Draghi’s hawkish speech on Tuesday has let the stimulus exit spirits out of the bottle and this has sent EUR/USD to New Year highs.

“In our view, any attempts by the ECB to plug the bottle from here will most likely only be able to send EUR/USD lower temporarily” Danske adds.

What has changed?

“While we thought previously that Draghi and co would hesitate in endorsing the Fed’s urge for policy ‘normalisation’, the ECB appears to have joined the Fed in having faith in the Philips curve, i.e. that inflation will pick up eventually. Markets are now pricing in the first 10bp ECB rate hike in the autumn next year which is broadly ‘fair’ in our view.

This in itself suggests limited support to EUR/USD from here from relative rates. However, as the political skies are clearing in the eurozone, a key obstacle for the market to buy the single currency has been removed. Combined with an ECB that will slowly – due to a still subdued inflation outlook – continue to prepare for an eventual exit, this is paving the way for the FX market to continue to correct some of the long-standing undervaluation in EUR/USD,” Danske argues.

Where to from here?

1-  “Overall, we expect to see much  more one-sided trading in EUR/USD going forward.

2– We  no longer expect  any  material dip  in the cross over the summer,

3-  With  any dips in the EUR/USD spot likely to prove shallow and short-lived

4-  We have upped our 6M forecast to 1.15 to reflect that we believe the  higher ranges are here to stay,” Danske expects.

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EUR: A ‘EUR-Phoria’ Rally; What’s Next? – TD

TD Research notes that the EUR looks set to close out mid-year as the top performing currency in G10 on the back of deep undervaluation and the prospects for policy normalization later in the year which have provided a tail wind for the single currency.

“The risks to the EUR-phoria theme is that the foundation that built the EUR rally looks flimsy over the coming months. Indeed, besides the reduction of political risks, the EUR rally coincided with the surge in EZ data surprises. This led to a steady rise in growth upgrades of the EZ economy in 2017 based on the BBG consensus (1.3% in Jan vs. 1.8% now),” TD adds.

“We like the structural EUR story but still look for a push back toward 1.11 and like EURJPY downside over the coming days,” TD argues.

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