The antipodean central banks are seemed to do pretty well with the weak currency. Aren’t they?
EUR/USD short-term and long-term forecasts from banks
Now, when political risks amid French presidential elections have faded, euro traders will focus on the Thursday’s European Central Bank monetary policy meeting and press conference. The market participants will be eager to know whether the ECB officials announce the withdrawal of the strong support they have lent to the Eurozone economy over recent years or not. It seems that they won’t do it and say that they are happy with their current monetary policy settings. In the face of a still subdued inflation outlook, prudence will prevail, the ECB won’t introduce any changes to its forward guidance and announce a slow pace of tapering in the next year, no cuts in the near-term future.
The major banks would probably agree with the aforementioned scenario for the ECB meeting. In the remaining part of the article, you may find some clues the banks’ strategists give you on the further direction of the euro.
The Bank of Tokyo-Mitsubishi UFJ
The banks' strategists note that the result of the first round of the French presidential elections was in line with markets’ expectation of a quite limited rally. They believe that the elections won’t have much further impact on the euro in the near-term.
In the longer term, the euro will be supported by the strong economic fundamentals coming from the Eurozone countries. The improving economic outlook of the EMU countries will prompt the ECB officials to adopt a less dovish monetary policy stance in the next quarters and don’t renege on their promise to taper QE at the end of the year.
The long-term outlook of the BTMU EUR/USD is a gradual drift higher towards 1.1200 by year end.
SocGen analysts believe that EUR/USD bearishness is behind us and that there is a development of the uptrend.
The reasons behind the aforementioned conclusion:
The tightening gap between the US Treasury/Bund yield differentials. SocGen strategists note that the low in EUR/USD were registered when real yields were down at -120bp in Germany, and +50bp in the US. The following divergence is not relevant anymore; the gap narrowed to 105bp by the end of the past week. If the US/German real yield differential continues narrowing, the bank counts on the EUR/USD appreciation towards 1.24.
Additional tailwind for the euro – the Euro Area’s current account surplus.
The European single currency rallied sharply in response to the market-friendly results of the first round of the French elections.
EUR/USD could stay for a quite long time at its current levels near the high of the year.
The further upside will depend on how constructive President Draghi will be while presenting the ECB’s updated outlook for the Eurozone on this Thursday.
Danske Bank analysts expect a slightly dovish tone from the ECB President on Thursday,
They believe that Draghi will probably reiterate the phrase he dropped earlier “a reassessment of the current monetary policy stance is not warranted at this stage.” This would be perceived as dovish and send EUR lower.
Danske believes the change in ECB’s forward guidance on policy rates will probably be introduced at the CB’s meeting in June.
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