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Flows are Coming Back to the Euro says Nomura, EUR/USD Forecast at 1.25 by Year-end

Euro to be supported by flows

  • EUR/USD spot at publication: 1.2077
  • Bank transfer rates (indicative guide): 1.1650-1.1740
  • Money transfer specialist rates (indicative): 1.1990
  • More information on bank-beating rates, here
  • Set a rate alert, here

Foreign exchange strategists at investment bank Nomura are forecasting an increase in the purchasing power of the Euro against the Dollar, driven in part by positive portfolio flows over coming weeks and months.

Research and data from the Japan-based international financial services provider shows a record portfolio outflow contributed to the EUR/USD weakness seen in the first quarter of the year.

However, "our high frequency flow tracking suggests optimism is creeping back in and could improve the portfolio flow story," says Jordan Rochester, FX Strategist at Nomura in London.

The Euro's decline against then Dollar at the start of the year flew against consensus expectations that held out for a rise in EUR/USD during the duration of 2021, with much of those advances front-loaded into the early part of the year.

Nomura analysts have however observed the inflow of European banking repatriation (of lending abroad) and say this has stopped Euro exchange rates from declining as much as they could have.

Portfolio flows can help analysts monitor shifts in investor sentiment, understand the drivers of flows, and predict future changes in flows and asset prices.

Euro flows and capital from Nomura

Chart courtesy of Nomura.

"In our view, the euro flow picture has been dismal for EUR bulls, but the stage may be set for a reversal right here, right now," says Rochester.

The Euro-to-Dollar exchange rate traded as high as 1.2349 on January 06, before succumbing to a steady downtrend that took in a March 31 low at 1.1704.

The pair has since recovered back to the 1.20's, where it is found ahead of month-end.

High-frequency flow data leads Nomura to forecast an extension of the Euro recovery, this trade is mostly driven by U.S. rates but there are some new Euro inflow factors to consider.

"We still expect a grind higher rather than another leg lower in EUR/USD," says Rochester.

Nomura forecast the Euro-to-Dollar exchange rate to trade at 1.25 by year-end and 1.28 by end-2022, "with the risks now pointed to the upside," says Rochester.

The pair is quoted at 1.2077 at the time of publication.

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