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Apr 02 - 06:55 PM

MUFG: EUR/USD Set to Remain in a Range but Drift Higher Later in The Year

By eFXdata  —  Apr 02 - 04:00 PM

Synopsis:

MUFG forecasts a steady yet gradual rise in the EUR/USD pair later in the year, following a period of range-bound movement. The market's anticipation of a 25bp rate cut by the ECB in June, which is nearly fully priced in, contrasts with a more cautious approach towards the extent of ECB rate cuts, now expected to total 100bps. This adjustment is influenced by the ECB's focus on wage growth as a crucial factor for achieving price stability.

Key Points:

  • ECB's Rate Cut Trajectory: The market strongly expects a June rate cut by the ECB, but MUFG anticipates a total of 100bps in cuts, potentially skipping a meeting in July for clearer evidence on price stability.

  • Impact on EUR/USD: Initial rate differentials might suggest downside risks for EUR/USD, but MUFG sees this as a temporary trend, with potential for the pair to climb higher later in the year.

  • US Data and ECB vs. Fed Dynamics: Weaker US data, coupled with mild improvements in Europe's domestic demand, could bolster the EUR/USD, especially as the Fed might have more leeway to ease compared to the ECB.

  • End of Negative Rates: The cessation of negative rates in the Eurozone has halted significant net bond outflows, providing additional support to the currency.

Conclusion:

While the EUR/USD may remain range-bound in the near term due to anticipated ECB rate cuts and existing rate differentials, MUFG projects a gradual increase in the currency pair's value towards the latter part of the year. This outlook is based on expectations of softer US data and a modest uptick in European domestic demand, alongside the ECB's and Fed's diverging monetary policies.

Source:
MUFG Research/Market Commentary

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