The sharp drop in EUR/USD is in line with unwinding optimism to reflation. Economists at Danske Bank continue to see EUR/USD towards 1.15 over the coming quarters.
Equities and inflation expectations should hold up, jobs needs to confirm
“From here, 1) broad equity indices should continue to do well, 2) jobs data should confirm and 3) inflation expectations (5y5y) should not fall too much. We expect Fed headlines/speeches to be hawkish over the coming weeks. If so, there is scope for further USD upside after the summer.”
“The Fed is communicating a strong belief in further US (jobs) recovery and this supports equities. For FX though, such also implies rising rates and a tapering of the reflation trends and the latter has been the dominant theme in FX.”
“We see a clear move away from financials, materials and similar (the equity reflation trade) towards technology and the quality-factor. EUR/USD is especially exposed as spot has been one of the big winners of the reflation theme (less so for e.g. in Latin America). Hence, Fed surprised markets whom are now squaring positions, in a sharp USD-positive move.”
“We continue to forecast EUR/USD towards 1.15 over the coming quarters on peak reflation and peak PMIs.”
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