BNP Paribas ultimately expect EUR/USD to fall back down to the range lows in the 1.05 mark, however, further euro resillience should see the exchnge rate remain elevated for a little while longer.
- Central bank divergence note dead - will likely put pressure on the euro and favour the dollar again.
- "We recommend selling EURUSD on rallies" - Handelsbanken.
The US Federal Reserve is unlikely to increase interest rates in 2016 and 2017 removing the most significant catalyst for more upside in the dollar, according to the research note authored by BNP Paribas analysts Serebriakov, Lynton-Brown and Sneyd.
"We think that a lukewarm economy will prevent the Fed from tightening any further in 2016 or 2017," the analysts say in a recent note to corporate clients.
The lack of upside traction in US interest rates should keep inflows into US assets contained, in doing so demand for the dollar will also likely remain tepid.
At the same time BNP reckon the European Central Bank (ECB) will not cut interest rates any further, placing a limit on downside for the EUR/USD pair.
The Eurozone’s high Current Account surplus is a further support to the euro as it makes the region a net lender to the rest of the world, with the result of more euro-denominated borrowing, and therefore more demand for the currency.
Paribas expect commodities to weaken and this to impact on the global outlook, the outlook for emerging markets and global growth expectations, which will further support EUR/USD as the pair has developed a binary reaction to risk-averse market conditions, which benefit the euro but weigh on the dollar.
The euro rises during times of crisis as the euro’s borrowed by investors to purchase higher risk emerging market assets are repatriated when those riskier assets are sold off.
The dollar weakens during risk aversion as it reduces the chances the Fed will raise interest rates, since a stronger dollar will only exacerbate global turmoil by making the high amount of dollar denominated debt held by poorer countries more expensive to repay.
Eventually Paribas expect the pair to fall back down to the range lows of 1.04 as the Fed starts to increase interest rates in 2018, and the ECB remains on hold.
The resulting divergence between the central banks will likely put pressure on the euro and favour the dollar again.
The views of analysts at BNP Paribas are similar to those of Swedish Lender Handlesbanken, who also expect strength in the euro in the short-term but weakness in the longer-term.
However, whilst Paribas foresee EUR/USD remaining elevated until the end of 2017, Handelsbanken expect it to strengthen more rapidly but then fall “after the summer.”
“We still have not taken out the 1.1714 high which previously led us to believe that the consolidation was taking the form of a narrowing triangle. We think this option appears less likely, especially as this option is negated in the case of the US dollar index. This suggests that we should see a test, and a probable break, of the 1.1714 Highs with the prices topping at around 1.18.”
After topping, however, Handelsbanken’s lead analyst Pierre Carlsson recommends selling the pair:
"We recommend selling EURUSD on rallies, as we expect it will trade lower after the summer," says Carlsson.
Handelsbanken are forecasting a return to 1.10 by the middle of 2016 ahead of a decline to parity towards the end of 2016.