EUR/USD: Scope to drift further lower – MUFG

The Euro is set to grind lower for now, according to analysts at MUFG Bank. They point out the European Central Bank view inflation riks different to elsewhere. Their forecast is for EUR/USD to drop to 1.10 by the end for the first quarter and to recovery to 1.14 by the third quarter. 

Key Quotes:

“Omicron looks set to be more disruptive in Europe than in the US and hence the ECB monetary stance will continue to be viewed as well behind that of the Fed. EUR/USD did bounce in December but we view this as reflective of positioning liquidation and a seasonal bias that favours EUR in December. Q1, and January in particular, tends to be the worst seasonal period for EUR and we expect EUR/USD to fall and possibly breach the 1.1000 level through the course of Q1 and into Q2.” 

“While the ECB policy stance is set to weigh on EUR, the macro backdrop should limit the downside. At the end of December Italy passed a EUR 32bn spending plan that includes tax cuts while the EU Recovery Fund impact should be seen more widely across the EU this year. Furthermore, while there is likely to be some uncertainty related to the French presidential election in April, the polling data suggests a reduce risk of any surprise defeat for President Macron. While EUR/USD could hit 1.1000 or below over the coming months, more positive factors and ECB liquidity withdrawal should see EUR/USD rebound in H2 to our year-end target of 1.1600.”