Analysts at MUFG Bank, see the EUR/USD pair moving sideways in the weeks ahead, in the 1.16/1.21 range. Upside risks for the euro, according to them, include further evidence showing that the global economy and European economies continue to recover faster than expected and Fed’s new goals while to the downside. While main downside risks includes an acceleration in COVID cases, the ECB fighting the stronger euro and Brexit.
Key Quotes:
“The euro has been consolidating at higher levels against the US dollar over the past month. The pair recently moved back above the 1.2000-level but it proved short-lived after it triggered more concern over euro strength from ECB officials. After hitting an intra-low of 1.0636 in March, the euro has strengthened against the US dollar by almost 13% to its recent peak at just above 1.2000. The ECB will be more concerned over the pace of recent euro gains rather than levels above 1.2000. According to our long-term valuation models, the euro is more modestly undervalued against the US dollar.”
“If evidence continues to build that inflation is falling further below the ECB’s target, pressure will build on the ECB to deliver more stimulus potentially including a greater openness to lowering rates deeper into negative territory.”
“While heightened No Deal Brexit risk will weigh more heavily on the pound, it is also likely to have some dampening impact on the euro.”
“The Fed’s increasingly dovish policy stance is keeping downward pressure on the US dollar more broadly. It makes it more challenging for the ECB to push back against euro strength right now.”
“There is a risk that the US dollar will correct higher in the near-term if the Fed disappoints in any way such as the delaying the timing of new easing measures until later this year.”
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