EUR/USD remains fundamentally overvalued – Danske Bank

The European Central Bank (ECB) raised the key interest rates on Thursday for the first time in 11 years. Analysts at Danske Bank expect the central bank to hike another 100bp this year, before halting its cycle. They still prefer the idea of selling ECB-induced euro rallies.

Key Quotes: 

“EUR/USD initially rallied close to 1.03 upon announcement before (paradoxically) ending the session below pre-ECB levels. In our view, this highlights one of our long-held views: currencies should primarily be treated as a play on the relative attractiveness of asset markets and only secondly as a play on relative rates. Higher shortened EUR rates on balance improve the carry attractiveness of investing in the single currency.”

“The larger-than-expected ECB rate hike and the signal of more frontloaded tightening also skew European asset return distributions to the left. This makes EUR-denominated assets less attractive. The lack of convincing details on the TPI programme highlights how the ECB cannot have its cake and eat it, in the sense that the price of tightening policy across the Eurozone requires a relatively tighter stance for the economies with the lowest r*s; Italy being the case in point. In turn, this challenges the investment outlook for the EUR that still suffers heavily on a relative terms of trade and cost-adjusted-productivity basis vis-à-vis the USD.”

“In our view, EUR/USD remains fundamentally overvalued. Hence, at this stage, we still like to sell ECB-induced EUR rallies and still pencil in EUR/USD firmly settling below parity over the coming quarters.”