Sentiment towards EUR/USD has changed. The recent surge has been driven by political risks reversing and by euro-area growth and equity outperformance. Valuation still suggests upside potential in EUR/USD medium term, but the cross looks increasingly vulnerable to a likely roll-over in the European business cycle.
What are the roadblocks for a continued EUR/USD surge? An ECB not ready to change signal on rates, and a Fed determined to both hike and initiate Quantitative Tightening should keep the cross in the 1.08-1.14 range within 3M.
We still see EUR/USD at 1.16 in 12M and 1.09 in 3M but stress that risks to these forecasts are predominantly on the upside. A gradual slide lower could materialise over the summer if euro-area growth outperformance wears off.
Tactically, we would look for opportunities to sell the pair for a near-term correction lower on ECB vs Fed policies. Strategically, we recommend EUR- (and Scandi-) based clients to add to USD hedges on a possible dip over the summer.
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