Danske Research discusses EUR/USD fair-value in light of revising its forecasts towards parity.
"We lower our current forecast on EUR/USD to 1.00 in 12M as we see a coordinated tightening of global financial conditions, further cyclical weakening among trading partners, large negative terms-of-trade shock to Europe vs US and broadening USD strength," Dankse notes.
"We view fair value for EUR/USD to be around 1.00, depending on the model employed. Either way, at current levels, valuation is a headwind for spot. There are a number of ‘second-round’ effects, which could strategically signal or entrench dollar weakness, which we are not seeing. These include 1) broad deregulation, 2) a dollar-based credit boom, 3) strong performance in Latin American assets, 4) a dollarnegative terms of trade shock (e.g. commodity prices decline on their own) and 5) a strong rise in European earning expectations versus US," Danske adds.