Remarks by MUFG on the euro, analysts there say they are sticking to their neutral bias for EUR / USD in the coming month. Citing:
- The ECB’s recent policy change helped provide some needed support for the EUR after it briefly tested and held support from the low in early 2017 at 1.0340.
- EUR has since arranged an emergency rally moving back into the middle of our forecast range. The turnaround for the EUR was bolstered by President Lagarde’s hawkish comments, signaling clearly that the ECB plans to accelerate the pace of political tension in response to further inflationary risks.
- The removal of a negative tariff policy should provide more support for the EUR going forward as it has proven effective in helping keep the EUR weak by encouraging record capital outflows into foreign bond markets while it was in place. It was more normal for EUR / USD to trade above the 1.2000 level in the decade before the introduction of negative rates.
About the risk of higher EUR going forward:
- EUR’s ability to extend its recent advance much further due to the normalization of ECB policy remains limited by continued downside risks of the Ukrainian conflict. It seems increasingly likely now that the conflict will prove to be longer lasting than initially expected and thus increase the risk of a longer period of disruption for the eurozone economy, which will slow growth and keep inflation higher for longer.