EUR/USD: Upside risks mounting - Danske Bank
According to analysts from Danske Bank, next week ECB meeting is likely to add upside risks for EUR/USD. They expect the pair to trade in a range around 1.13 near-term but warn that risks remain on the upside longer-term.
“The July ECB meeting will, if anything, likely add to upside risks for EUR/USD: when Draghi started the exit talk at the Sintra conference, he also opened the lid for the cross for good, i.e. this was the catalyst for the FX market to start to correct its long-standing undervaluation. We still see EUR/USD in a range around 1.13 near term but risks remain on the upside longer term. That said, speculators are now long EUR/USD (IMM data), which suggests that further upside near term will be more difficult to bring about.”
“If the ECB removes its readiness to increase the size of QE (as is our base case for July), then the FX market should merely see this as a natural follow-up to Draghi’s speech at the Sintra conference in late June. That is, it would simply segment the idea that the ECB has started its journey – if very slowly – towards an exit on negative rates, a move already partly priced into EUR/USD.”
“More broadly for the FX market, the seemingly synchronised urge for policy ‘normalisation’ among central banks – and led by the ECB - recently may be dubbed the ‘Sintra accord’. Central banks – including the ECB - now appear reasonably complacent regarding the inflation outlook to possibly leave worries over the deflationary impact of currency appreciation behind. In that sense, the ‘Sintra talk’ may be viewed as an acceptance of broader USD weakness ahead (and thus gives some association with the 1986 Plaza accord if clearly not as vocal).”
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