Danske Research discusses EUR/USD outlook over the next three months comes from a series of binary events.
"We are looking at four independent binary events, i.e. four draws from a Bernoulli distribution, with probabilities and payoffs given by our subjective opinion.
Roughly, there is a 60% chance the US election yields fiscal stimulus, which takes EUR/USD two figures higher; conversely, 40% for a three figure drop.
We expect the EU budget to be approved at 75%/25% with payoff -3/+1.
Brexit is dealt with at 60%/40% and a skewed payoff around -3/+1.
Lastly, pent-up demand (vaccine) is released in Q1, with the probability 60%/40%, payoff -2/+2," Danske notes.
"From this, we do a simulation (Chart 1). It shows the 1-3M outcome space for spot is similar to a credit bond. We see a long left-tail of ‘catastrophic’ events such as no fiscal support in the US, no-deal Brexit and so on. In this light, EUR/USD is set to shift higher almost solely in the absence of bad news, albeit clearly risks are skewed on the downside," Danske adds.