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EUR/USD: Is the Bullish Consensus Beginning to Crumble Again? 

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- EUR at bottom of six-month range pending growth signals.

- Consensus still favours economic and euro recovery in 2019.

- But J.P. Morgan says sell, and Q1 data is just around the corner.

The Euro-to-Dollar rate has a tough few months ahead of it regardless of whose forecasts you look at but analysts are now diverging in their projections for the single currency at year-end, which could be a sign that the bullish 2019 consensus is beginning to crumble. 

Much like the previous year, 2019 began with a strong consensus suggesting the U.S. Dollar would soon come undone and the Euro would once again have its time in the proverbial sun. But barely more than three months in, there are ominous signs that this year could end up reading like a rerun of the last. 

The Euro had entered 2018 having been buoyed by a strong upturn in the economy and speculation the European Central Bank (ECB) could soon be winding down its quantitative easing programme and eventually contemplating interest rate hikes. 

That had seen analysts turn ever more bullish in their predictions, with consensus looking for a Euro-to-Dollar rate of 1.28 by the end of 2019 and some forecasters eyeing levels north of 1.30. But by the end of March J.P. Morgan had told clients the Euro was "screening as a sell" on its financial models.

During the ensuing month the Euro stalled after having risen 4% during the opening quarter. And concurrently, J.P. Morgan's doubts about the Euro had been echoed by Rabobank strategists, who argued Federal Reserve (Fed) rate hikes and interest rate differentials would soon weigh on the exchange rate.  

Above: Euro-to-Dollar rate in 208, at daily intervals, with annotations.

First-quarter 2018 economic data had by this time managed to work its way into the market and although most advanced economies disappointed last year, investors had the sugar high of U.S. tax cuts to look forward to if they were to hold North American financial assets including the big Dollar. 

By May 2018, the once-bullish consensus that had envisioned a Euro-to-Dollar rate of 1.28 by year-end had all but cracked. Bank of America, Morgan Stanley and Credit Suisse wrote to clients that month advocating that they bet on a fall that would take the exchange rate down to 1.16 even as some other voices clung to the consensus. 

Signs of a further loss of economic momentum in Europe early in the New Year, combined with expectations of an upturn in the U.S. and the resulting interest rate implications, were the foremost factor in the subsequent undermining of the Euro-to-Dollar exchange rate

A similar story has played out thus far in 2019, although it still remains to be seen how the rest will unfold. As far back as September 2018 the Dollar's 2019 demise, and a subsequent Euro recovery, was consensus for this year. 

As recently as this week Goldman Sachs stood by its forecast of 1.22 for EUR/USD at year-end and Commerzbank left its projection of 1.20 unchanged. Previously, Bank of America and Morgan Stanley reiterated forecasts of 1.25 to their clients last month. MUFG reiterated its projection, in February, of 1.22 for year-end 2019. 

Above: Euro-to-Dollar rate shown at daily intervals, annotated with Goldman Sachs target.

At the heart of those bullish views is often the assumption that an economic slowdown in the U.S. will gather pace before the curtain closes on 2019 and that economies elsewhere in the world will stabilise, which could see financial markets anticipate increasingly steep interest rate cuts from the Fed. 

A milestone test of this theory will come through late April and May by which time economists will have received enough information to form a decent picture of the global economic landscape in the first quarter. Official quarterly growth figures should start emerging in May. 

The U.S. economy was always expected to slow from the multi-year high rates of growth seen following the White House tax cuts of 2018 so a lower rate of growth in the U.S. would not necessarily take the market by surprise.

However, if official data was to reveal a further sharp slowdown in Eurozone growth during the first quarter, then it could be enough to rattle the bullish consensus that still underpins the Euro-to-Dollar rate even as it sits at the bottom of a now-six-month range.

And it could eventually prove to have been a telling sign that the FX team at J.P. Morgan wrote to clients again this month suggesting that they sell the Euro relative to a range of other currencies, and notably the so-called safe-havens that are the Dollar, Japanese Yen and Swiss Franc.  

Above: Euro-to-Dollar rate shown at weekly intervals.

"Our growth forecast for the Euro area has been stable for just three months (EM has been stable for five). Moreover, the surprisingly-large drop in core inflation (0.2% miss) highlights risks surrounding the ECB’s rate guidance, especially when taken in context of an ECB that is arguably undershooting its inflation mandate," says Meera Chandan, a strategist at J.P. Morgan. "Cyclical headwinds to the euro thus keeps us bearish on the currency on the crosses (JPY, CHF) and the dollar." 

Chandan has advocated trade ideas to clients that would profit if the EUR/CHF, EUR/JPY and EUR/USD rates fall over the coming months.

However, she also acknowdledges that a "further improvement in regional data" cannot be ruled out, which explains why only the EUR/CHF trade is a cash one. The other two both utilise options structures. 

Chandan and the J.P. Morgan team forecast a Euro-to-Dollar rate of 1.12 until the end of June. They project 1.14 for the end of September and 1.16 for December 2019.


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