EUR/USD: In the hands of Trump and Fed near term – Danske Bank

Research Team at Danske Bank notes that the EUR/USD has moved higher in the past few weeks, driven by a narrowing of the US-EU interest rate spread, the indirect effect of a lower USD/CNH, which transmitted to a more broad-based long USD covering.

Key Quotes

“Moreover, the pricing of reflation has been taking a breather due to, among other things, the high uncertainty about Trump’s economic policy plans. Near term, we believe growth and relative rates will continue to move in favour of a stronger USD.”

“We target EUR/USD at 1.04 in 1M (1.02 previously) and 1.05 in 3M (1.04 previously) but stress that risks are skewed on the downside in the short term, conditional on Trump and the Fed.”

“Longer term, we maintain our long-held view that the undervaluation of the EUR and the wide Eurozone-US current account differential are EUR positives. In addition, the Fed may become worried about the strength of the trade-weighted USD, which would mitigate rate increases. We target EUR/USD at1.08 in 6M and 1.12 in 12M.”