EUR/USD: Back on gradual recovery path towards 1.20 - UOB

 Analysts at UOB, explained that the the ingredients for a more sustainable recovery in the EUR against the US dollar are now falling into place in 2019. According to them a recovery in the euro increasingly likely, with the anticipated passing of monetary policy tightening leadership from the Federal Reserve to the European Central Bank. They see EUR/USD bottoming and rising gradually across next year from 1.15 to 1.20.

Key Quotes: 

“The EUR 2.6 trn bond-buying programme has been formally concluded by the end of 2018. To a certain extent, the massive stimulus plan by the European Central Bank’s (ECB) has kept the EUR/USD pinned within a 1.05 to 1.25 range since its implementation in early 2015. So, once the ECB’s balance sheet stops expanding in 2019, one of the key pressure points against the EUR could start to alleviate.”

“With policymakers still largely confident that they would weather the slowdown, discussions by the ECB about its maiden rate hike would eventually begin in 2019. This is likely to a key upside catalyst for the EUR especially where pricing for a rate move higher is very modest now.”

“Market consensus has yet to price in any meaningful odds of any rate hike from the ECB across 2019. But once the ECB starts hiking rates, this will be in stark contrast to US monetary policy as the FED would have reached the tail end of its rate hiking process in late 2019.”

“With EUR/USD stabilizing around 1.13 in recent weeks, risk reversals have similarly bottomed and appear to be grinding higher as well. Unless there is a severe reescalation in the EU-Italy fiscal dispute, further downside in EUR/USD is limited and the positive factors mentioned above are likely to spur a more sustainable rally in 2019. Overall, we see EUR/USD bottoming around current level and rising gradually across next year from 1.15 in 1Q19 to 1.20 in 4Q19.”