Analysts at Nordea Markets suggest that the inflation spread between the US and the Euro area is still picking up, which leads to diverging central bank outlooks and the potential for lower EUR/USD.
Key Quotes
“Judging from our forward-looking inflation models, EUR/USD should head lower to levels below 1.15, before rebounding higher in Q4.”
“We also continue to hold the view that a more wide-spread escalation of the trade war is a long-term USD positive risk scenario, as a trade-war will lead to slowing global growth, which usually coincides with a stronger USD.”
“Another factor that supports our story of “lower before higher” in EUR/USD is the relative supply of EUR and USD in the respective banking systems.”
“Over the next three to five months it is hence most likely that the withdrawal of USD through the Fed’s balance sheet unwinding will outpace the EUR TLTRO repayments. This leaves downside risks for EUR/USD from a relative supply perspective. Hence we lower our 2018 end forecast from 1.23 to 1.20 and stress the downside risks.”
“Heading into late this year and also 2019, we expect the relative liquidity withdrawal to turn EUR/USD positive again, as TLTRO repayments will start to gather pace – and our long-term target of 1.30 is still on the cards for EUR/USD in late 2019.”
Share
