We are past the peak of repricing US exceptionalism, global growth should broaden and the vaccine and growth laggards should bounce back. This should be conducive to a return of broader USD weakness, according to economists at Deutsche Bank who see European currencies as the prime beneficiaries – they forecast EUR/USD breaking 1.25 by September.
Time for the euro to participate in dollar weakness
“Despite the big rise in US yields, the trade-weighted dollar is sitting at the bottom end of a range that has prevailed since 2015. The divergence speaks to extreme macro imbalances – booming consumption but lagging job creation. As a result, the Fed is likely to be the last G10 central bank to taper this year while the US current account deficit continues to deteriorate.”
“The European outlook is looking favorable. We expect a sizeable bounceback in the relative EU-US PMI differential in coming months. Such inflection points have historically seen EUR/ USD rallies. The euro has shown significant positive non-linearities to the interest rate differential when bund yields turn positive and if the ECB tapers ahead of the Fed, this should further help the euro.”
“The trade-weighted dollar is at a big technical level: the low-end of a range that has prevailed since 2015. The risks are skewed towards a break-out lower. We see EUR/ USD reaching 1.25 over the summer months.”
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