EUR/USD to plummet towards 1.15 on a 12-month horizon

The narrative of a strong US economy relative to the EU continues and economists at Danske Bank forecast the EUR/USD at the 1.15 level on a 12-month view.

US economic outperformance continues

“The US is likely to experience a very rapid normalization of the labour market and other macro indicators over the next 6-12 months. In markets, these expectations are seen through high levels of equities, low credit spreads, as well as from inflation expectations running at 2.6%. US fiscal policy and a good pace of vaccinations support this.”

“We continue to see Chinese tailwinds as slowing and this will be a counteracting factor for the European uptick, both of which are likely to coincide during H2.”

“The Fed has given some sporadic guidance linked to inflation in Q4 and high levels of vaccinations. One should expect talks of tapering to pick up during H2. However, we see the ECB more likely to de facto end PEPP in H2 21 rather than in Mar22 as expectations on the European recovery and higher inflation are firm.”

“We keep our current profile unchanged, in favour of USD. The key risks to watch are 1) the expectations for US recovery must be met, 2) questioning if the EU can surprise on the upside and/or 3) the state of the next leg in US-China tariffs. As has been the case since the onset of COVID-19, the potential outcomes for EUR/USD are very wide, irrespective of us seeing a stronger dollar in our base case.”

“We still target EUR/USD at 1.15 in 12M.”

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