Stagflation rhymes with peak performance for Europe; implications for EUR - Danske

eFXdata reports that analysts at Danske Research offer their outlook for EUR/USD.

"Since markets shifted from focusing on the unknowns of COVID to the global policy reaction - in the early summer of 2020; 'Europe' as an investment theme has seen a revival. With it, there has been no shortage of calls for EUR/USD to 1.30, of pieces written on a regime shift having happened in fiscal policy, oversubscription to social bonds and much more. However, narratives change. Right now, it seems more like rising interest rates amid a cyclical slowdown and rising energy prices is the perfect storm for a capital flow reversal."

"We have seen such reversals on several occasions and the repricing is always quite swift. If this is indeed the case, then it will be many years before analysts again contemplate a revival of Europe as a theme, or 1.30 in EUR/USD. Stagflation, rapid cyclical slowdown, rising interest rates and a correction in valuations may prove to be a very negative capital shock to the euro area and its asset prices."

"We target 1.13 in spot EUR/USD in the next year but if stagflation, cyclical slowdown and rising rates become dominant themes, then there seem to be clear downside to such estimate."