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17.08.2016 05:54

EUR/USD Will Reach 1.20 Before It Reaches 1.00 - Danske

"Growth. US growth surprised on the downside in Q2 but recent labour market data has surprised on the upside. Private consumption should be supported in coming months despite the weak July retail sales. European data have been stronger than we expected given Brexit but the sharp slowdown in the UK is likely to impact the eurozone with a lag. As such, we expect to see some softness in European data in the coming months.

Monetary policy. The Fed was slightly more hawkish than expected at its July meeting. Fed chairman Janet Yellen is likely to give more clarity on her thinking regarding monetary policy at her Jackson Hole speech on 26 August. We believe that the Fed will wait until H1 17 to raise interest rates again. The market is pricing around 40% probability for a 25bp rate hike before end- 2016 which appears fair. Meanwhile, we expect that the ECB as a minimum will have to extend its QE purchases beyond March 2017 but it is unlikely that it will cut interest rates further.

Flows. The market is short EUR/USD according to IMM data but not in stretched territory. As such, this increases the sensitivity of the cross to any impetus from relative rates.

Valuation. Both our PPP and MEVA models suggest the mid- 1.20s are 'fundamentally' justified and thus that the cross remains undervalued.

Forecast: 1.12 (1M), 1.12 (3M), 1.14 (6M), 1.18 (12M).

Risks. Political risks in the eurozone and in the US will weigh on markets in coming months. However, this can be both EUR and USD negative.

Conclusion. We are adjusting up our EUR/USD forecasts to 1.12 in 1M (from 1.09) 1.12 (1.07), 1.14 (1.10) and 1.18 (1.14). These are the forecasts we had before Brexit. Brexit has not had the economic impact on the eurozone as we expected. While we believe that there will be some slowdown in the eurozone in coming months, we still do not expect that the ECB will cut rates. Political uncertainty could weigh on both the EUR and the USD.

We maintain our long-held view that the undervaluation of the EUR and the wide eurozone-US current account differential are longerterm EUR positives. Hence, EUR/USD will reach 1.20 before it reaches 1.00".

Copyright © 2016 Danske, eFXnews™

17.08.2016 06:19

WSE: Before opening

Market Focus

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  • German private sector output growth slowed for the second month running in July
  • ECB's Mersch says as conditions normalise, it is unlikely that uncoventional policies will remain necessary
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