EUR/USD: Euro downside move might have further to run – MUFG

Despite falling sharply and reaching levels under 1.1300 (EUR/USD), analyst at MUFG Bank consider there remain factors that could encourage further declines going forward for the euro. They see the negative momentum around the euro likely to persist. 

Key Quotes:

“Our FX forecasts have shown EUR as the laggard over the forecast horizon given the scope for the ECB to remain well behind most other G10 central banks in hiking rates. In October, there was a notable shift in rate expectations higher that dragged even EUR rates higher. The 3-year forward OIS for EUR turned positive in October but economic developments in the euro-zone lately and ECB communications have driven rates back into negative territory.”

“The economic risks have certainly deteriorated and while those risks may be better priced now, things can still get worse. Austria today announced a full lockdown with covid risks elevated across numerous euro-zone countries. The shifting economic risk profile could quickly change what markets expect from the ECB at its December policy meeting. Suddenly, the ECB may have strong justification for maintaining a more dovish stance through a larger or longer APP program. Developments in the coming days will be key. Secondly, we have the minutes from the last FOMC meeting next week.”

“The September BoP data released today from the ECB highlighted negative portfolio flows at that point. Euro-zone investors bought EUR 27.7bn worth of foreign long-term debt securities and foreign investors sold EUR 30.8bn. With global yields set to rise notably further relative to the euro-zone this is a factor that could further weigh on EUR performance over the coming months.”

“While we have already seen a sharp drop in EUR/USD, there remains scope for this to continue over the short-term at least.”