EUR/USD to move towards 1.16 in one-to-three months – Danske Bank

Economists at Danske Bank see EUR/USD moving towards 1.16 in one-to-three months, as they expect the consensus story on reflation and notably the Fed to be tested and that it may currently be somewhat optimistic. What’s more, EUR/USD is set to move back towards 1.12 on six-to-twelve months as the US is expected to outperform Europe on productivity over the longer-term.

Key quotes

“FOMC minutes showed the Fed is trying to strike a balance between high macro uncertainty while also acknowledging improvements in markets and data alike. Looking ahead, it seems clear the policy stance ahead will be based on whether: i) global demand keeps improving as expected, ii) we get another dose of fiscal easing to buffer the shortfall in personal income, and/or iii) an unwind of the tightening of banks' credit conditions is witnessed. Since the July meeting, all three of these have been pointing towards improvement.” 

“For the ECB, given favourable liquidity operation terms and ongoing ECB PEPP purchases, the increasing excess liquidity from the ECB will act as a weakening pressure on the EUR. Thus, we see EUR/USD risks as tilted to the downside, as the consensus narrative of European outperformance now seems stretched.”

“Our main scenario is that optimism towards EU economic outperformance remains elusive and thus, this time is not different. This will likely take EUR/USD quite a bit lower and we keep our forecast unchanged. We, therefore, target 1.16 in one-to-three months and 1.12 in six-to-twelve months. Markets have priced a closing of the productivity gap vis-à-vis US but we do not expect this to materialize.”

“Upside risks to take us towards 1.25, say, include 1) EU proves to be an engine of world growth, 2) the Fed credibly commits to inflation overshooting and 3) harsh regulation of US technology companies.”