EUR/USD to trade closer to the 1.10 in Q1 before drifting gradually higher – MUFG

Analysts at MUFG Bank expect the EUR/USD pair to trade in the 1.100-1.1650 range during the next weeks. They see the pair moving to the downside, before staging a gradual rebound after the first quarter. 

Key Quotes:

“The pair has found more support closer to the 1.1000-level similar to between 2015 and early 2017, and more recently between late 2019 and early 2020. The price action fits with our view that the EUR has become more deeply undervalued against the US dollar which is helping to dampen further downside risks in the near-term.”

“Our long-term PPP model estimates that EUR/USD is currently trading around one standard deviation below fair value which comes in at around 1.1250. It was only back in the early 2000’s that EUR/USD traded at even more extreme levels of undervaluation for a more sustained period of time.”

“There is still room to price in more Fed hikes further out the curve and price in a higher terminal rate. Additionally, the Fed could announce plans to begin shrinking their balance sheet sooner and more quickly than in the last tightening cycle. As a result, we still expect EUR/USD to trade closer to the 1.1000- level in Q1 before drifting gradually higher later this year.”

“One potential trigger for a weaker EUR in the month ahead is posed by rising geopolitical tensions between Russia and the West.”