CIBC Research discusses EUR/USD outlook and adopts a mild bullish bias, expecting the pair to trade through 1.15 by end of Q3 and at 1.16 by year-end. CIBC highlights 3 reasons why EUR/USD rally is likely to be measured rather than swift.
"While low inflation may be met by a potential insurance cut by the ECB, a fairly constructive outlook for the near-term should see a modest EUR appreciation," CIBC notes.
1- Despite the ECB indicating that the domestic outlook is still constructive, we’ll continue to monitor it closely. Draghi maintained confidence that he was prepared to expand the toolkit once more if necessary, which should keep the EUR grounded – at least temporarily.
2- However, there are additional reasons to expect the EUR rally to be measured rather than swift. Long EURUSD trades remain costly both from a carry perspective and from a hedging perspective.
3- The options market is now skewed in favour of EUR calls, making topside EURUSD calls more expensive than before. There’s time for EURUSD to move higher, but it requires more than just an extension of cheap funding for domestic banks. What’s needed is outperformance of European data relative to the US," CIBC adds.