A break lower in the EUR/USD pair to new lows remains plausible in a scenario of tighter financial conditions, explain analysts at MUFG Bank. They point out the scale of the sell-off of the dollar does highlight the limits to the bull-run from here and with so much Federal Reserve tightening priced, they still expect the US dollar to weaken more notably later in the year.
“We are sticking to our neutral bias for EUR/USD in the month ahead. The ECB’s recent hawkish policy shift has helped to provide some much-needed support for the EUR after it briefly tested and held support from the low in early 2017 at 1.0340. The EUR has since staged a relief rally moving back into the middle of our forecast range. The turnaround for the EUR has been reinforced by hawkish comments from President Lagarde signalling clearly that the ECB plans to speed up the pace of policy tightening in response to upside inflation risks.”
“The removal of negative rate policy should provide more support for the EUR going forward given that it has proved effective at helping to keep the EUR weak by encouraging record capital outflows into foreign bond markets while it has been in place. It was more normal for EUR/USD to trade above the 1.2000-level in the decade prior to the introduction of negative rates.”
“The EUR’s ability to extend its recent advance much further on the back of the normalization of ECB policy remains constrained by ongoing downside risks from the Ukraine conflict. It appears increasingly likely now that the conflict will prove more prolonged than initially hoped and thereby increases the risk of a longer period of disruption for the euro-zone economy that will both dampen growth and keep inflation higher for longer.”
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