Morgan Stanley Research adopts a strategic bullish bias on EUR/USD targeting 1.23 over the medium-term on the FX hedging flows.

"Our forecast of 1.23 in EUR/USD in the coming months is driven in part by an increase in EUR/USD's premium to rate differentials, reflecting more FX hedging. We find that European hedge ratios are impacted by hedging costs, FX vol, and  USD sentiment, and we estimate the sensitivity of hedge ratios to each," MS notes.

Our forecasted 80bp drop in EUR/USD hedging costs boosts hedge ratios by 2.2pp; given $9.6tn of current European assets, this translates to $210bn of buying.  We estimate $210bn of EUR/USD buying boosts EUR/USD about 4% over a 12m period, pushing EUR/USD well above the forwards," MS adds.