EUR/USD: Expectations of another downside lurch for euro are fading – MUFG

Analysts at MUFG Bank forecast the EUR/USD pair will trade around 1.1300 by the fourth quarter of this year. They consider the European Central Bank (ECB) is set to act again. 

Key Quotes:

“The general level of optimism globally on hopes of smooth reversals of lockdowns has been reinforced in Europe by the progress toward reaching a deal on a recovery fund. One of our key premises for an eventual turn higher in EUR/USD was based on the view that European officials would finally agree a more meaningful support package for key economies in the euro-zone. The break above 1.1000 for EUR/USD was triggered by progress being made on this key issue.”

“We do not expect the German constitutional court decision questioning the legality of QE under the other PSPP QE program to hinder ECB actions. If anything, in a show of determined independence it could encourage the ECB to act forcefully. But reduced fears over fragmentation may still see yields in Germany heading higher, thus closing further the current UST-Bund 10yr spread, which will provide further support for EUR.”

“Our expectations of another downside lurch for EUR are fading. A previous range of 1.06-1.10 may have shifted now to 1.08-1.12. However, we remain cautious over the upside scope given US-China tensions are escalating and could hinder EUR gains.”