Article | Eur/USD outlook by Simon Knappstein

18-05-2016 | by Simon Knappstein |

The US Dollar is currently going through a soft spell. Most markedly against EM, but also against the EUR. Upside seems contained so far by the very easy monetary policy of the ECB. The question is if we are witnessing simply an extension of the ranging price movement as seen in the last 5 quarters or whether this is the start of a lasting recovery?

FX Prospects consensus forecast for EUR/USD is 1.1020 in 3 months and 1.0810 in 12 months.

Let’s take a closer look at the arguments that argue for a higher EUR/USD than consensus.
Danske Bank is in the longer term the most bullish, forecasting a shallow move lower to 1.12 in 3 months and a subsequent move higher to 1.18 in 12 months.
Nordea is looking for a move to 1.16 in 3 months only to see the pair fall thereafter to 1.05 in 12 months.

Danske is expecting for relative rates to play a more important role in the near term where the ECB will be challenged once again on its mandate by market inflation expectations and the Fed might turn out a bit more upbeat on a September rate hike. This, coupled with a Brexit risk premium weighing on the EUR as well, should lead to some downside in the next 2 or 3 months. Further out, they expect valuation to drive the EUR/USD higher to 1.18.

Nordea on the other hand, sees the EUR strengthening in the near term on a combination of a diminished likelihood of deeply negative rates by the ECB, potential risk aversion that leads to some EUR short covering and a dovish shift in the Fed’s reaction function. Further out then, as this dovish shift is reflecting an undue focus on domestic- and global risks (Brexit, China) that do not materialise, a hawkish re-pricing of the curve will support the USD at the same time that increasing inflation in the EZ is lowering real rates and leading to EUR-negative portfolio outflows. Bringing EUR/USD to the aforementioned level at 1.05 in 12 months.

These are two very different views on where EUR/USD is heading. It is not though, a matter of who is wrong and who is right. Opposing opinions help you make up your own mind and improve on your investment decisions.