DANSKE BANK. The combination of euro weakness and a re-pricing of the Fed has led to a significant decline in EUR/USD over the past weeks and we see no reason why it should stop just yet.
We have been forecasting EUR/USD to fall in H1 and bounce in H2. That is still our base case. The strong US February non-farm payroll figure supports our call that the Fed will hike in June; this has yet to be priced in, driving further USD strength.
Moreover, we have clearly underestimated the ‘hot potato’ effect’s impact on the EUR, where the combination of rising excess liquidity and negative deposit rates drives investors towards riskier assets and weakens the EUR. All in all, we expect diverging inflation and monetary policy to drive EUR/USD lower over the coming 3-6 months. We are reviewing our EUR/USD forecasts in light of recent developments.
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