EUR/USD to continue escalating after some consolidation – MUFG

During July the euro strengthened further against the US dollar, moving from 1.1247 to 1.1819. Policy optimism provides support to the shared currency. The EUR/USD pair may experience some consolidation in the near-term but economists at MUFG see upside potential in the long-run.

Key quotes

“While the composition of the EUR 750 billion package was altered with EUR 390 billion available for grants versus the original EUR 500 billion, the details remain supportive for the outlook ahead. Crucially, this positive sentiment is also reflective of the sound management of COVID in Europe. There are some risks to this of course. Spain in particular, but other countries too, have shown a notable escalation and containing the spread of COVID will be important for keeping EUR on a trend higher.”

“The consequence of reduce fragmentation risks in the euro-zone is greater support for yields in Germany versus the periphery and versus UST bonds. The scale of narrowing in the UST-Bund spread is very significant and points to a turn in EUR/USD trend to the upside. We do not see this changing with the Fed’s focus of QE very much on maintaining lower yields for longer.”  

“EUR upside potential is building as evident from the spot move in July. The scale of the move means some correction or consolidation is probable over the short-term. But the longer-term EUR/USD trend is now higher.”