EUR/USD: Fed To Fuel A 'Negative Summer Cocktail' – Danske

Danske Bank FX Strategy Research holds an anti-consensus view that sees the Fed skipping hiking at the tomorrow’s meeting and instead announcing the triggers for quantitative tightening (QT). 

However, Danske argues that such an outcome should be USD positive and should lead to the start of a correction in EUR/USD over the Summer.

“For EUR/USD, a hawkish stance from the Fed would come at a time where the ECB has admittedly moved a tad closer to ‘neutral’ on rates but at the same time laid out an inflation outlook that deters Draghi and co from looking for an easing exit any time soon. In our view, this makes for a period where EUR/USD could move to the lower end of its newfound 1.08-1.13 range.

Should the Fed refrain from hiking in June, the knee-jerk reaction will most likely be to send EUR/USD higher, but we do not expect a move much above the 1.13 level. However, in our base case that a summer hike will come – if not June, then July – we think that as markets digest the boldness with which we think the FOMC will move near term, USD strength will materialise for a while,” Danske argues. 

In line with this view, Danske remains tactically short EUR/USD targeting 1.09 in 3M but sees levels below 1.10 as attractive for positioning for a renewed uptick towards the end of the year.

Source: Danske Bank Research

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