EUR/USD: Fed-ECB divergence should send Euro higher over the next six months - Danske Bank

The Federal Reserve has clearly signalled forthcoming easing according to Danske Bank analysts. They expect a 25bp rate cut in July and an additional two rate cuts before year-end point and mentioned: “this will contribute to sending the USD weaker as the carry attractiveness of the USD diminishes.”

Key Quotes: 

“The Fed is now clearly saying it will lower rates to keep the record-long expansion going and mitigate the ongoing weak global growth numbers.”

“We do not expect global data to turn around for the better and see little risk of an end to the trade war anytime soon. Fed should hence stay dovish and pave the way for a continued trend higher in EUR/USD. However, a trade deal would also be USD negative.”

“A trade deal and a ‘decent Brexit’ would be positive for the Eurozone and could pave the way for positive surprises later in the year, as a lot of negativity is priced in on the euro political side. The ECB is trying to talk down EUR/USD but we expect these efforts to have only secondary effect.”

“External balances, as measured by relative current-account balances, hint at EUR/USD upside medium term but as history suggests, a deficit is sustainable for prolonged periods, notably for a world reserve currency such as the USD.”

“On 1-3M, Fed initiating an easing cycle will do most of the lifting, while on 3-6M a US-China trade deal should weaken USD. We see EURUSD at 1.14, 1.15, 1.17 and 1.17 in respectively 1M, 3M, 6M and 12M.”