Danske Bank FX Strategy Research notes that recent ECB communication topped by Draghi’s hawkish speech on Tuesday has let the stimulus exit spirits out of the bottle and this has sent EUR/USD to New Year highs.
“In our view, any attempts by the ECB to plug the bottle from here will most likely only be able to send EUR/USD lower temporarily” Danske adds.
What has changed?
“While we thought previously that Draghi and co would hesitate in endorsing the Fed’s urge for policy ‘normalisation’, the ECB appears to have joined the Fed in having faith in the Philips curve, i.e. that inflation will pick up eventually. Markets are now pricing in the first 10bp ECB rate hike in the autumn next year which is broadly ‘fair’ in our view.
This in itself suggests limited support to EUR/USD from here from relative rates. However, as the political skies are clearing in the eurozone, a key obstacle for the market to buy the single currency has been removed. Combined with an ECB that will slowly – due to a still subdued inflation outlook – continue to prepare for an eventual exit, this is paving the way for the FX market to continue to correct some of the long-standing undervaluation in EUR/USD,” Danske argues.
Where to from here?
1- "Overall, we expect to see much more one-sided trading in EUR/USD going forward.
2– We no longer expect any material dip in the cross over the summer,
3- With any dips in the EUR/USD spot likely to prove shallow and short-lived
4- We have upped our 6M forecast to 1.15 to reflect that we believe the higher ranges are here to stay,“ Danske expects.
Source: Danske Bank Research
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