We have been calling for a lower EUR/USD for a long time but it has moved faster than we had expected. The collapse in oil prices, political uncertainty and ECB QE expectations have weighed more on the EUR than we had expected.
Near term, we expect EUR/USD to fall further ahead of an ECB QE announcement on 22 January and the Greek election on 25 January. Medium term, rebounding euro area growth and monetary repricing should support the EUR.
We revise our EUR/USD forecast profile lower. We now forecast EUR/USD at 1.16 in 1M and 1.14 (previously 1.22) in 3M but we maintain the view that EUR/USD will eventually bounce back, bottoming around 1.12 (1.20) in 6M and grinding towards 1.17 (1.23) on a 12M horizon.
Leverage funds should stay short EUR currencies: in our FX Trading Portfolio, we are long USD/CHF and short EUR/GBP. Scandi-based clients with USD-denominated income may consider hedging via knock-in forwards whereas expenses should be hedged with forwards.
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