The timing and magnitude of the surge in EUR/USD alongside the slide in Bunds over the past week has surprised us. Near term, technicals and positioning warn of further EUR/USD gains towards pre-QE levels at 1.15-1.17.
Our high-frequency inflation indicator hints that deflation fears are starting to decelerate. We see last week's price action as an early warning that 'reflation' will emerge as a theme but the time is not yet ripe for a wider pricing of this.
We are adjusting our EUR/USD forecasts higher but continue to expect a 'V', where we maintain that EUR/the cross will be in for another leg lower ahead of a first Fed hike in September. We now see EUR/USD bottom at 1.02 (previously 0.99) on a 6M horizon but still forecast a rebound towards 1.08 in 12M.
Leveraged funds should stay sidelined in EUR/USD. Scandi real money funds should use this opportunity to lower short-term FX hedge ratios on USD exposures. Corporates should hedge 6M USD income via knock-in forwards.
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