TD Research discusses the EUR outlook and sees a scope for a 1.20 test over the coming weeks. TD prefers buying EUR/GBP and buying EUR/USD on dips.
"What's next? While trying to fade some of the excesses priced into the markets the past few months, we have steadily revised our USD forecasts lower. We see plenty of EUR runway in the quarters ahead. Our LFFV composite (low-frequency fair value), pointing to an 8% discount. Barring FEER, the other three models price a 10-15% discount. Given the EUR half-life of this composite measure runs about ten months, that puts EURUSD in a 1.20-1.25 range next year. The test of 1.20 may happen sooner, but we stress that lots of good news has been priced and we still prefer to buy on dips than chase things here," TD notes.
"A clean EUR trade is to buy EURGBP, which trades with little bias on the mobility trends. It's unlikely that European assets will continue their meteoric rise without interruption, leaving us to focus on these relative value distortions. The next big USD move is lower, but that will take months and quarters rather than days," TD adds.