EUR/USD risks becoming more two-way – MUFG

The EUR/USD is about to post end higher for the second weekly in a row, “notable gains” according to analysts at MUFG Bank. They point out that the bounce in the pair is very notable and is becoming more difficult to simply dismiss out of hand as just a temporary reversal. 

Key Quotes:

“EUR/USD is heading for a second week of gains for the first time since April 2021. The percentage increase over the two-week period is close to 3%, which if we exclude the very volatile period during the period of covid, would be the largest two-week gain since February 2016 when the US dollar reversed course on the back of Fed communications suggesting a slower pace of monetary tightening in response to the financial crisis in China at that time.”

“Our current FX forecasts shows a low-point of 1.0400 in Q2 before a gradual increase through the second half of the year. The price action of late reinforces our view that the scope for notable further US dollar strength from here is becoming more limited.”

“There are risks that this current bounce in EUR/USD could fade and we could correct lower as financial conditions tighten again, risk aversion becomes more pronounced and there is a renewed flight to the dollar. We are mindful though that if those conditions do not materialise relatively soon, EUR/USD could rally further.”

“There are reasons for us to believe that US dollar strength could emerge again. While EUR/USD could drift lower again there are factors to suggest better support for EUR/USD is emerging. We remain sceptical of parity being hit.”