Credit Suisse discusses EUR/USD outlook and sees a scope for further gains towards 1,0950 before topping in the near-term.
"We argued that three factors were behind EURUSD strength since end-Q3: 1. A much-improved terms of trade position linked to the collapse in European energy prices, which is an ongoing source of support. 2. The peak in US terminal rate expectations which started as US inflation topped out, and then the subsequent push towards ever-greater inversion between late ’23 and late ’24 implied SOFR rates, as sharp Fed rate cuts were priced in. 3. The hawkish tilt by the ECB itself, especially after the 15 Dec ECB meeting, when President Lagarde suggested 50bp hikes could be the norm going forward for some time to come," CS notes.
"So where do things stand now? Thus far there is no sign yet that either the terms-of-trade effect or the Fed inversion effect are about to turn around, leaving our original rationale for more EURUSD strength before a peak is reached intact. . What has changed though on the margin is the pricing for ECB hawkishness While this is not enough to cause us to change our framework yet that sees more EURUSD gains to 1.0950, it does encourage us to hold onto the idea that gains much beyond that could be harder to see if the euro area rates inversion story gathers pace till further," CS adds.