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Mar 22 - 12:55 PM

BofA: 4 Conflicting Narratives About The Long-Term EUR Outlook

By eFXdata  —  Mar 22 - 11:00 AM

Synopsis:

BofA explores four prevailing narratives surrounding the long-term outlook of the Euro (EUR) and its relationship with the U.S. Dollar (USD), revealing mixed implications and no substantial change in the long-term EUR/USD equilibrium, which remains slightly above 1.20. The discussion contrasts views on USD debasement, US exceptionalism, ECB's positive rates, and Eurozone's potential negative shocks, ultimately demonstrating the complexity of forecasting EUR/USD dynamics.

Key Points:

  • USD Strength vs. EUR Weakness: The last decade's lower-than-equilibrium EUR/USD average reflects USD strength rather than inherent EUR weakness, with the EUR maintaining robustness in trade-weighted terms.
  • Ambiguous Fundamental Trends: Examination of inflation credibility, current accounts, government debt, terms of trade, and productivity yields a mixed picture, complicating the EUR/USD outlook.
  • Stable Equilibrium Estimates: Utilizing BEER (Behavioural Equilibrium Exchange Rate) model, IMF's REER (Real Effective Exchange Rate) model, and PPP (Purchasing Power Parity) estimates suggests the EUR/USD equilibrium has consistently hovered above 1.20, indicating no significant shifts in recent years or over the last decade.

Conclusion:

The long-term outlook for EUR/USD is fraught with conflicting narratives that make a clear forecast challenging. Despite fluctuations and divergent views on economic fundamentals and policy impacts, equilibrium estimates suggest a somewhat stable outlook for EUR/USD above 1.20. As such, investors and analysts should navigate the complex dynamics between the EUR and USD with caution, acknowledging the potential for prolonged deviations from the equilibrium rate amidst ongoing global economic and geopolitical uncertainties.

Source:
BofA Global Research

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