The relative fundamental divergence ahead remains more EUR/USD supportive – MUFG

Economists at MUFG Bank analyze EUR/USD outlook. 

ECB caution coupled with falling inflation means higher real yields

“The level of real yields should begin to pick up again in the Eurozone relative to the US. The ECB is likely to vote for rates hikes at the next two meetings even as inflation shows signs of easing which should be EUR supportive.”

“The primary risk to the view comes on the US side and if economic activity shows limited signs of further slowdown, there are risks of further declines in EUR/USD. Also, a worse than expected global backdrop could see manufacturing activity in Germany influence the broader economy more than expected.”

“But we maintain our assumption that growth in Germany and the Eurozone shows some modest rebound which will contrast to the deceleration in US economic activity as we move toward recessionary conditions by year-end.”