We look for EUR/USD to remain range bound over the next three months within the 1.1479-1.1880 interval.
Near-term risks are on the downside from both USD (risk of Fed repricing, US tax reform progress) and EUR (EU political risks, ECB halting 'normalisation' trades).
Further out (6-12M), we still see the cross moving firmly into mid-1.20s supported by valuation and debt-flow reversal arguments. We target 1.25 in 12M.
Low implied FX volatility (and high carry) makes non-linear hedging instruments attractive for USD assets/income.
We recommend EUR- (and DKK-) based clients hedging USD assets/income to hedge either short via 1-3M risk reversals where a premium is paid (net volatility buyer), or long by buying 12-15M EUR/USD call options (or via risk reversals where a premium is paid).
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