EUR/USD to target 1.07 in 1M – Danske Bank

Analysts at Danske Bank explain that with political risks to a large extent over for now, with Macron’s win in the French presidential election, focus now turns to fundamentals and they target EUR/USD at 1.07 in 1M, 1.09 in 3M, 1.11 in 6M and 1.16 in 12M.

Key Quotes

“A marked divide has materialised between the US and the Eurozone lately with data surprises in the latter increasingly positive, whereas the opposite is the case for the US. Confidence in president Trump’s fiscal agenda is fading and stimulus will clearly be smaller and deferred compared with expectations. In the euro area, the output gap has yet to close and a sustained region-wide pick-up in wage growth is still far off, in our view.”

“While expectations about Fed tightening remain below FOMC dots, pricing has been upped lately. We maintain that the Fed will likely use the June meeting for communication regarding ‘quantitative tightening’ (QT) and not hike until July; we expect one more hike in December and three in 2018. Although there is room for the market to price the Fed more aggressively, shifts in policy stances are key. Thus we see the ECB as instrumental to any direction in monetary policy: a first 10bp hike from the ECB is currently priced mid 2018 but a signal that the Governing Council is changing its communication on rates should send EUR/USD higher.”

“The level shift after the first round of the French election took EUR/USD into higher ranges and was testament to political risks having been key in deferring the cross from moving higher. Near term, while the ECB will likely grow a tad more hawkish in June in light of the recent upside surprises to both activity and inflation, the Fed is simultaneously set to announce a QT scheme which is ‘unchartered territory’ for US markets. This could support the USD somewhat near term but we stress that the significant move to watch out for on a 12M horizon will likely be fuelled by an ECB shift away from further easing.”