Credit Agricole CIB FX Strategy Research expects political risks to subside after the second round of the French elections on Sunday, and also believes that the ECB is still on course to cut the pace of its asset purchases from next year and announce the changes as soon as September.
While this should trigger unwinding of EUR-funded carry trades and support the single currency, CACIB thinks that market speculation about ECB’s true intentions may linger until early June.
In addition, CACIB notes that the gap between EUR/USD and our proxy for relative policy outlook – the 2Y EUR-USD rate spread – has widened even further in recent days, offering no fundamental support to the currency pair.
All in, CACIB believes that these factors could mute EUR/USD gains but still holds the view that dips are a medium-term term.
EUR/USD is trading circa 1.0910 as of writing.
Source: Credit Agricole CIB Research
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