EUR/USD to trend lower and find support at the 1.16 level – Credit Suisse

Economists at Credit Suisse still expect EUR/USD to remain in a mild downtrend in Q3 while there is an asymmetry to further short-end rate differential widening in favour of the USD – their expected Q3 range is 1.16-1.22 and they like to sell rallies towards 1.20. But tighter long-end spreads diminish the likelihood of bigger losses for EUR.

Clear ECB message that strength is not welcome

“The roughly EUR20 B per week of PEPP purchases may slow down for seasonal-issuance-related reasons in late summer. But ahead of the ECB’s Strategy Review slated for the autumn, we feel a dovish core message will come again at the 22 Jul ECB meeting.”

“The Strategy Review could see a tilt towards a more symmetric inflation target around 2%, even if it doesn’t turn into Fed-style average inflation targeting. Avoiding disinflation mishaps ahead of that point due to a rates or EUR jump seems a prudent approach.”

“The NextGenerationEU bond issuance program has got off to an impressive start, helped by generous pricing for AAA-rated debt as the EU strives to create a benchmark for what could be a permanent future EU yield curve. This provides psychological and material support for EUR at levels approaching EUR/USD 1.1600.”  

“Sep German elections look likely to deliver a gov’t with conventional policies, leaving them an FX non-event. French elections in Q2 2022 promise more spice, but are too far away to matter now, especially after recent regional elections proved a failure for Le Pen’s RN.”