Petr Krpata, Chief EMEA FX and IR Strategist at ING, suggests that they are revising their already constructive EUR/USD forecast higher, looking for two discrete “jumps” in EUR/USD – one this year, the second next year and they expect EUR/USD to reach 1.15 in 3Q this year and be at 1.20 around mid-2018.

Key Quotes

“The dissolution of the French election risk will allow market participants to fully focus on the next key theme in FX markets the ECB QE tapering – which should be EUR positive and lead to the first one-off discrete jump from the current 1.10 to the 1.15 level.”

“As was the case during the US taper tantrum in 2013, we expect long dated EZ yields to increase meaningfully in response to the market anticipating a lower pace of ECB purchases, in turn directly benefiting EUR (similar to the 2Q15 period when Bunds sold off and EUR/USD rallied).”

“Thereafter, we expect EUR/USD to stabilize around the 1.15 “gravity line” (with frequent over and undershoots – the latter most likely around the end of this year, when market participants start becoming concerned with Italian election risk).”

“After a period of stability, we look for the second discrete jump in EUR/USD to 1.20 around mid-2018 when the second leg of the ECB monetary policy normalisation kicks in (given that the ECB will be closer to lifting the deposit rate). This should lead to a meaningful rise in short-dated German and EZ yields – to the benefit of the EUR.”

“The 5 big figures increase in EUR/USD in 2018 is consistent with our model simulation of the narrowing US-EZ short-end rate spread and its spill over in EUR/USD.”

“While we expect the Fed to continue raising rates, we note that the market already prices in 44bp of a Fed funds rate hikes this year. This means a limited room for an upside USD and that EUR/USD should be primarily driven by the EUR leg.”

“The two step ECB monetary policy normalisation (the end of QE, then the deposit rate hike) will throw the profound EUR/USD undervaluation into sharp relief, with the cross being 12% undervalued. Valuation should change from being a “limiting” factor (limiting the EUR fall in past years) into an “amplifying” factor facilitating a EUR rebound.”

“While we don’t underestimate the EZ political risk around 1Q18 Italian elections (at that time we see downside risks to our EUR/USD 1.15 forecast), we note the diminishing impact on the EUR of various EZ political crises over recent years. We expect EZ political risk premia to be more reflected in the EUR derivative market than EUR spot.”

“The rise of the EUR/USD should be a large positive for G10 European currencies versus their dollar peers as the strong EUR will lift all tides in Europe. Short USD/SEK positions should do well, partly due to the insufficient Riksbank extension of its QE.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended content


Recommended content

Editors’ Picks

EUR/USD extends rebound to 1.0500 amid US Dollar weakness

EUR/USD extends rebound to 1.0500 amid US Dollar weakness

EUR/USD preserves its recovery momentum and trades near 1.0500 in the European session. Despite the risk-averse market atmosphere, the US Dollar is struggling to find demand ahead of mid-tier data releases, helping the pair hold in positive territory.

EUR/USD News

GBP/USD clings to recovery gains above 1.2150

GBP/USD clings to recovery gains above 1.2150

GBP/USD gained traction and climbed above 1.2150 during the European trading hours. The modest US Dollar weakness provides a boost to the pair as the market focus shifts to third-quarter Unit Labor Costs data from the United States.

GBPUSD News

Gold price struggles to gain traction, holds above $1,770

Gold price struggles to gain traction, holds above $1,770

Gold price is having a difficult time gathering bullish momentum and continuing to fluctuate in a tight range slightly above $1,770. The benchmark 10-year US Treasury bond yield holds steady above 3.5% ahead of US data, not allowing XAU/USD to find direction.

Gold News

JP Morgan joins forces with Ripple partner in the UAE, what this means for XRP price

JP Morgan joins forces with Ripple partner in the UAE, what this means for XRP price

JP Morgan will work alongside Al Fardan Exchange LLC in the United Arab Emirates (UAE) to power faster transaction settlement and transfers in fiat currencies.

Read more

Are global rate markets too complacent about central bank intentions for 2023?

Are global rate markets too complacent about central bank intentions for 2023?

Markets and economists are split between a 25 bps and a 50 bps rate hike (bringing the key rate to 4% or 4.25%) but are eager to hear about the Bank of Canada’s future guidance.

Read more

Forex MAJORS

Cryptocurrencies

Signatures