EUR/USD poised to keep the 1.16 handle near term – Danske Bank

Sverre Holbek, Senior Analyst at Danske Bank, believes the pair should stay under pressure in the next months.

Key Quotes

“EUR/USD temporarily broke the 1.16 level on Friday following strong US figures and a continuation of the downward momentum in the cross driven by Thursday’s dovish ECB taper, the Catalan issue Trump’s tax progress and the prospect of a more hawkish Fed Chair/Vice Chair”.

“We have emphasised that range trading in the cross would persist but have to acknowledge that relative rates could be starting to make a comeback as a driver, and with the ECB having anchored the short end of the EUR curve for now, this is unlikely to prove positive for EUR/USD on a 3M horizon”.

“We now await a Fed Chair announcement and stress the resurfacing of downside risks to our 1M and 3M forecast of 1.17 and 1.18, respectively, as a cocktail of renewed belief in ‘Trumponomics’ (if a tax reform is passed) and a blossom-up of eurozone populism (if the market start to focus on e.g. the Italian election) is a real risk near term”.

“That said, EUR/USD longs were liquidated ahead of the ECB last week (and likely after as well), which suggests risks are now more balanced from a positioning point of view. We expect to see the cross settle above the 1.16 level in the coming days provided Powell gets the stint as Fed chair (more important to watch this week than e.g. the FOMC meeting), and we still recommend clients with USD exposure to use dips to lock in income/assets beyond a 6M horizon”.