As we look to the ECB policy decision later today, BofA is chiming in with their view on where EUR/USD looks to be headed in the months ahead.
Given the circumstances with the Middle East conflict, the firm notes that there is still more potential for EUR/USD to navigate to the downside as markets underestimate the diverging paths between the euro and the dollar.
“There is a case to be made for EUR/USD to potentially trade through our Q2 forecast of 1.14, which is also just below its 12-month lows. The growth divergence between the US and euro area is notable and arguably being underpriced by rates markets.
But hope for a peace agreement in the Middle East has prevented larger themes from taking hold. Even as there has been some associated reprieve in energy markets, upside risks points to downside risks to the EUR (from a terms-of-trade perspective). This suggests a real possibility of further USD supportive Fed repricing, while ECB hikes could prove counter-productive for the EUR… We prefer to fade rebounds and continue to look for renewed downside.”
The point on the ECB is one that will gather more interest after the rate hike today of course.
As mentioned before, the central bank is in a very tough spot in having to bring monetary policy back to near restrictive territory in order to prepare for the battle against inflation. But in doing so, they are risking sending the economy over the edge at the same time.
One policy misstep is enough to send the economy on a recession spiral or if not an inflation one. And in either of those cases, the euro currency looks likely to suffer the consequences.
This article was written by Justin Low at investinglive.com.
