A very dovish tone from the ECB today removes key driver for EUR/USD upside
As a result we lower our EUR/USD and EUR/CHF forecast profiles markedly
We now see very limited upside in EUR/USD and merely target 1.17 in 12M
ECB removes key driver for EUR/USD upside this year
The ECB took us by surprise today, as the expectation of a 2019 hike was a pillar of our bullish EUR/USD view this year. In light of the very soft ECB message, the drop in EUR/USD from just above the 1.13 mark before the announcement to briefly below 1.1250 was not as large as this significantly dovish package warrants, in our view. Indeed, we would expect to see the cross slide further in coming days. We no longer see an ECB hike on a 12M horizon, see our ECB review , 7 March 2019, and update our FX view accordingly.
We previously stressed that the prospects of an end to the ECB-Fed policy divergence this year held the potential for a sustained uptick in EUR/USD towards the end of the year, i.e. that an end to Fed hikes, a US-China trade deal and a first ECB hike would, in combination, take the cross towards 1.25 in 12M. The latter is now taken out of the equation with this not in sight on a 12M horizon. Indeed, today's ECB communication highlights that all policy options are back on the table and - crucially for the FX market - this opens up the range of possible policy outcomes and introduces an 'ECB easing risk premium'. Importantly, it also postpones the potential for a capital-flow reversal to support the EUR as negative rates will reign in the euro zone for some time still. That said, valuation still holds a hand under EUR/USD and a US-China trade deal with positive spill-over to Europe remains a medium-term positive.
Consequently, we are changing our EUR/USD and EUR/CHF forecast profiles, which is where we see the greatest impact from our change in the ECB call to reflect that we now see very limited upside potential in these crosses this year.
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