EUR/USD Marching Back to 1.20: Soc Gen
- Written by: Gary Howes
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Strategists at Société Générale are out with a note Tuesday saying the euro-dollar exchange rate looks to be on the march back to 1.20.
"There is a very good chance now, that if we do indeed see a fresh de-escalation of the conflict (and in particular, reopening of the Strait of Hormuz), EUR/USD will breeze back above 1.20 on a wave of positive sentiment," says Soc Gen's head of FX strategy and research, Kit Juckes.
The dollar is fast losing its war 'premium' as it is now lower against the pound and euro than where it was before hostilities started on February 28.
EUR/USD rises to 1.18 on Tuesday, amidst signs that the U.S. and Iran are firmly on the road to a negotiated peace deal, even if the journey will inevitably be rocky with intermittent disappointments.
The market bet is that the reopening of the Strait of Hormuz under an agreement would allow global energy markets to recover relatively quickly.
Despite this view, economists at Soc Gen reckon enough has been done to raise inflation in the Eurozone by enough to warrant a response from the European Central Bank. They pencil in two rate hikes this year and none from the Federal Reserve.
That rate divergence should bolster euro-dollar.
"It does help make a further rise in EUR/USD all the more likely," says Juckes.
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Learn More →Strategist Noah Buffam at CIBC Capital Markets also thinks the dollar has lost the advantage and that it won't revisit conflict highs even as there are risks "of slight escalation in the near term as both sides jockey for leverage."
"We see most USD pairs as offering good medium term shorts, with our preference being for pairs which are highly disconnected from rate spreads. We recently went long EUR/USD with a medium term horizon," says Buffam.
However, strategists at MUFG Bank say the euro remains at risk, and they are staying short as a result.
"We are maintaining our short EUR/USD trade idea to reflect the risk that the Middle East conflict could escalate further. While the two‑week ceasefire is a positive development, it remains fragile, as highlighted by developments over the weekend," say strategists at MUFG in a weekly FX briefing.
They warn that until the Strait is reopened, expect energy prices to remain elevated, and supply shortages could have a larger negative impact on economies outside the U.S., supporting a stronger USD.
However, MUFG also acknowledges that the USD has not strengthened as much as expected so far in response to the energy price shock, "which makes our trade idea for further USD appreciation less attractive."
