What's new? In Why EUR/USD should fall near term and rally medium term ,13 February, we discussed what we saw as the key EUR/USD positive/negative factors for the year ahead. As our belief in the 'Trump factor' is fading and as we expect euro-zone inflation to peak, we re-assess the outlook for EUR/USD below.
What now? Watch out for:
- Fed to become less accommodative but market pricing remains substantially below FOMC dots beyond 2017: moreover, USD liquidity is set to tighten again - EUR/USD negative.
- ECB to scrap exit discussions and extend QE (delivering no deposit-rate hike) as a drop in inflation ahead will increase the pressure for more easing - EUR/USD negative.
- Fundamentals such as valuation and current-account balances remain supportive - EUR/USD positive.
Wildcards. Keep an eye on the following risk scenarios:
1. What if the ECB lifts rates before end of QE?
2. What if Le Pen wins the French election?
3. What if 'Trumponomics' returns with a vengeance?
Outlook and strategy. EUR/USD to stay within the 1.04-1.10 on a 1-3M horizon with downside risks dominating near term but upside potential remaining longer term. Notably, for clients with USD income/assets, the coming months should in our view provide good opportunities to lock in levels using forwards on horizons beyond 6M.
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