While reflation hopes are somewhat on standby – postponed, if not cancelled – the case for sustained USD weakness towards year-end is paused. As a result, economists at Danske have flattened they EUR/USD profile: they now see the cross peaking in three-to-six months at 1.20 (previously 1.23) and for now, the cross looks in the 1.15-1.19 range.
“We expect the cyclical uptick in Europe (and elsewhere) to continue over the coming months. The introduction of new European lockdowns, a marginally hawkish Fed, mild weakness in the data, verbal intervention from the ECB and a likely postponement of the payments linked to EU fiscal support have caused EUR/USD to take a step back from previous highs (1.18-1.20), to around 1.17.”
“Upside risks to take us above 1.20 include the EU proving to be an engine of world growth and/or the Fed credibly committing to inflation overshooting (which it has not as of today). The combination of positive progress with US fiscal policy, Brexit, the corona situation and global growth may culminate by year-end. If all goes well, we could see a new test of 1.20.”
“We see scope for a new test of 1.20 but risks have increased over September, as we have seen a hawkish Fed and Europe has disappointed across data, politics and the handling of corona. We have lowered our three-to-six months projections to 1.20. We note that December includes an unusual number of events that we expect to define the risk and EUR/USD as we go in to 2021. Until we see a firm change in the macro narrative, we expect EUR/USD to range-trade at 1.15-1.19 and for volatility to remain.”
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