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Mar 05 - 12:55 PM

Danske: Anticipating Muted EUR/USD Reaction to ECB's March Policy Meeting

By eFXdata  —  Mar 05 - 10:45 AM

Synopsis:

Danske Bank forecasts a muted market reaction to the upcoming European Central Bank (ECB) March policy meeting, citing alignment with current market pricing and expectations. The bank expects EUR/USD to trend lower throughout the year, influenced by the U.S.'s relative economic strength and signs of more persistent underlying inflation compared to the euro area. Despite recent boosts to EUR/USD from positive risk appetite and a global equity rally, Danske believes these factors ultimately favor the USD due to the rally's U.S.-centric catalysts.

Key Points:

  • ECB and Market Pricing: Danske notes the ECB, under President Lagarde, seems comfortable with the current market expectations, including intra-euro area spreads and front-end pricing, reducing the likelihood of a significant shift in financial conditions post-meeting.

  • Expected Market Reaction: With recent data releases largely in line with the ECB's staff projections, Danske anticipates a subdued response from EUR/USD to the ECB's March policy decisions.

  • Outlook for EUR/USD: The bank maintains a bearish outlook for EUR/USD, driven by stronger economic indicators in the U.S., a rally in equity markets attracting flows to the USD, and more persistent inflation in the U.S. relative to the euro area.

  • Forecast: Danske projects EUR/USD to reach 1.05/1.04 within a 6 to 12-month horizon, underpinned by the U.S. economy's stronger position in terms of trade, real rates, and unit labor costs compared to the euro area.

Conclusion:

Danske Bank anticipates a muted reaction to the ECB's March policy meeting, supported by the alignment of current market pricing with the ECB's outlook. The bank's bearish stance on EUR/USD is fueled by the relative economic and inflationary strengths of the U.S., alongside a U.S.-centric equity rally that favors the USD. Danske expects EUR/USD to decline to 1.05/1.04 over the next 6 to 12 months, reflecting a stronger U.S. economic backdrop compared to the euro area.

Source:
Danske Research/Market Commentary

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