Lowering Our Target On Short EUR/USD To 1.00 From 1.05

• We lower our target on short EUR/USD to 1.00 from 1.05
• EUR/USD to undershoot near-term on ECB ‘hot potato’, Fed
• We are reviewing our EUR/USD forecasts

Strategy
We previously lowered our target for short EUR/USD on 5 March to 1.05 from 1.09 (see Danske Bank FX Trading Portfolio: Lowering our target on short EUR/USD to 1.05 from 1.09, 5 March). Since then, EUR/USD has fallen 5 figures and we see no reason why it should stop just yet. In our view, the ‘hot-potato’ effect of ECB QE, with the combination of rising excess liquidity and negative deposit rates driving investors towards riskier assets, will weaken the EUR further. We believe the rally in European equities is driving further EUR weakness, as non-European real money managers have to sell EUR/USD to maintain high FX hedge ratios on EUR exposure. In addition, we suspect that non-eruozone investors are selling EUR govies to the ECB which is driving EUR weakness. The speech by the ECB’s Cæuré yesterday signalled strong commitment to QE despite better eurozone data, supporting more EUR weakness.

IMM positioning data from the week ending 3 March showed that speculators slashed net EUR shorts last week, completing a three-week period of improved speculative EUR sentiment, which has lifted non-commercial EUR positioning to the least bearish level of 2015. Clearly, short EUR/USD positioning has increased in recent days following the collapse in spot, but we do not see positioning as hindering more EUR/USD losses. Technically, the break below the 61.8% Fibonacci retracement of the move from 0.8228 to 1.6040, at 1.1212, opens the door for further losses ahead of 1.0071. Psychologically, parity at 1.00 attracts.

Fundamentals
We have been forecasting EUR/USD to fall in H1 and bounce in H2. That is still our base case. The strong US February non-farm payrolls figure supports our call that the Fed will hike in June; this has yet to be priced in, driving further USD strength. We are bullish on European GDP growth, forecasting it to rise to 1.5% in 2015. However, this is unlikely to help the EUR before the ECB has been successful in fighting deflation. We expect diverging inflation and monetary policy will drive EUR/USD lower over the coming 3-6 months. We are reviewing our EUR/USD forecasts in light of recent developments.