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).
“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.”
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.