ANZ Research outlines some key reasons for a gradual EUR appreciation through the rest rest of the year. ANZ targets EUR/USD at 1.10 in Q3 and 1.12 by year-end.

"We are aware of the ever-present risks around the war in Ukraine, but see several reasons why EUR/USD may be basing:

The euro’s uncertainty discount is well priced, and divergence is emerging between the EU Policy Uncertainty Index and EUR/USD. Uncertainty has been a key driver of EUR weakness since the Russian invasion of Ukraine, but is starting to recede," ANZ notes.

"Inflation has picked up sharply, and the ECB is signalling a policy U-turn. It will begin raising rates in July, and 50bp moves are being debated.

The energy crisis in Europe is driving a faster adoption of green energy and energy efficient technologies, with the support of fiscal spending. The EU recently announced EUR210bn in new funding, equivalent to 2.0% of GDP, supplementing the EUR250bn already earmarked to address climate change. Investment spending will be strong.

Combined with the ECB’s preference for a stronger exchange rate, rising interest rates and fiscal expansion provide a positive backdrop for gradual EUR appreciation," ANZ adds.