EUR/USD: What is the fair value? - SocGen

Sandeep Kanihama FXStreet Contributor

According to Kit Juckes, Research Analyst at Societe Generale, 'Fair value' for EUR/USD is somewhere between the PIIE estimates of FEER fair value (1.18) and the OECD's estimate of PPP (1.33).

Key Quotes

“The gap between neutral policy rates in the euro area and the US is above 1%, but below 1.5%. As long as longer-dated rates differentials and expectations of where rates will be in the future are significantly wider than that in favour of the US dollar, there's every reason to expect the euro to trade well below fair value. As the market starts pricing in a return towards a more neutral rate differential, however, pressure on the euro to get back to a neutral valuation will grow. And the risk is that it will do so quickly, because of the size of the current account surplus. Therein lies the ECB's challenge. Rapid euro appreciation would tighten financial conditions prematurely, but how can they get markets used to the idea of eventual policy normalisation without causing the currency to appreciate?”

“Our forecasts, looking for a move by EUR/USD towards 1.20 in the second half of this year, before the euro loses momentum, are really just a stylised attempt at showing the shorter-term risk that the ECB can't control the correction, while reflecting the likelihood that the currency market plays a part in policy normalisation. But in practice, the only thing we can be confident about is that while there's pressure for a spike and possibly for an overshoot, the path is going to be anything but straight.”

Author

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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