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Jun 04 - 12:55 AM

BNP Paribas: Limited Upside for EUR/USD with Q3 Target at 1.05

By eFXdata  —  Jun 03 - 04:30 PM

Synopsis:

BNP Paribas maintains a cautious stance on the EUR/USD's potential for a sustained rally, targeting the pair at 1.05 by the end of Q3. Despite recent favorable data from the Eurozone, they anticipate the currency pair will struggle against several headwinds.

Key Points:

  1. Current Trading Range: EUR/USD has recently moved towards the middle of its year-to-date range. BNP Paribas forecasts it will revert to the lower end, at 1.06, by year-end.

  2. Economic Data and Energy Prices: U.S. data has plateaued while Eurozone data, including PMIs and GDP, have outperformed expectations, supporting the euro temporarily. Decreasing energy prices have also helped reduce some of the risk premium in the EUR.

  3. ECB and Fed Rate Cuts: The European Central Bank is poised to start its rate-cutting cycle sooner than the Fed, which could unfavorably alter interest rate differentials against the euro and potentially increase its use in carry trades.

  4. Investment Flows: The ongoing wide growth differential with the U.S. and the initiation of ECB rate cuts may lead to a diversion of the Eurozone’s current account surplus towards higher-yielding, higher-growth assets abroad.

Conclusion:

While recent improvements in Eurozone economic indicators provide some support to the euro, BNPP expects these factors to be overshadowed by the impending ECB rate cuts and the persistent growth differential with the U.S. Consequently, they project a downward trajectory for EUR/USD, targeting 1.05 by the end of Q3.

Source:
BNP Paribas Research/Market Commentary

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