EUR/USD: Euro is deriving support from three favourable developments – MUFG

The Euro has continued to strengthen modestly against the US Dollar at the start of this week. Economists at MUFG Bank analyze EUR/USD outlook.

What is helping to provide more support for the Euro?

We believe that the Euro is deriving support from several favourable developments. Firstly, the Eurozone rate market has been pushing back the timing of the first ECB rate cut. The timing of the first ECB rate cut is now judged as more likely to be delivered in June rather than April (there is now only around 9 bps of cuts priced in by then). At the same time, the total amount of ECB rate cuts priced in by year-end has fallen back to around 88 bps. The developments are helping to ease downward pressure on the Euro in the near term.

Secondly, there have been some encouraging developments that are helping to ease concerns over the growth outlook in the Eurozone. The price of natural gas in Europe is continuing to fall. It makes us more confident that the negative shock to the Eurozone economy will continue to ease in the year ahead. This supports our expectations for a pick-up in growth in the 2H of this year as inflation continues to slow back to the ECB’s target. At the same time, there is building optimism over the global inventory cycle that could indicate a potential pick-up in global trade going forward which would be a supportive development for the Eurozone economy. 

Finally, the recent easing of investor pessimism over China’s economy has been lifted by fresh stimulus measures which is also helping to ease near-term selling pressure for the Euro. The upcoming National People’s Congress in March is a potential positive catalyst should more stimulus measures be announced.