Euro / Dollar Forecasts at Credit Suisse Raised
Analysts at Credit Suisse have bumped up their forecasts for the Euro against the US Dollar.
On 29 March analysts at the bank made a major directional change in their EURUSD outlook, switching from longer-term bears to bulls.
They have now taken another step and upped their forecast targets having acknowledged that both political and economic developments in the Eurozone continue to beat their own bullish expectations.
For example, while they had incorporated a Macron French presidency win into their original forecasts from March, they had not anticipated follow-through momentum so strong as to suggest Macron's party would by now been seen as likely to win a parliamentary majority too.
Concerning the data, eurozone numbers continue to beat even lofty expectations, as
evidenced by May Markit PMI data or Germany's May IFO numbers.
The ECB is meanwhile seen by Credit Suisse as likely to start spelling out a framework for withdrawal from extraordinary monetary policy from September, but to move in that direction in June by removing references to downside economic risks and / or the need for still lower interest rates.
As for EUR valuation, Credit Suisse have take note of Merkel’s comments on the Euro’s valuation.
Germany's Merkel and Schaeuble have both made comments suggesting acceptance or even encouragement of further strength, while most economists feel it would take a move to levels into the 1.20–30 range before there is an impact on exports and output.
US Dollar sees Support Wane
However, arguably the biggest driver behind the EUR/USD exchange rate upgrade appears to be the Dollar side of the equation.
Analysts, like the market in general, have been disappointed by the inability of President Donald Trump to push through his agenda of lower tax and increased government spending.
Recall that the Dollar rocketed higher following Trump’s victory in November in anticipation of such policies being announced.
2017 has been a story of political bungling and an inability to gain the kind of consensus to deliver on these objectives.
While much of these events have been put into the Dollar’s valuation, Credit Suisse argue further declines remain likely.
“US data momentum can turn downward while political developments still have room to deteriorate,” says Credit Suisse analyst Shahab Jalinoos.
Forecast Changes
Credit Suisse change their EURUSD 3m and 12m forecasts to 1.15 for both tenors (previously at 1.10 and 1.12 respectively).
“With the Fed still priced at 75% to hike rates in June, there is still room for USD downside surprise if this does not materialize, or if US political developments deteriorate further,” says Jalinoos.
Meanwhile in the Eurozone, sequential positive surprises continue on both the data and political front.
“Still, given the sanguine pricing on EUR downside risk now in risk reversal skews, we believe the EURUSD rally is in a mature phase and see relatively limited room for gains beyond our forecasts at this stage,” says Jalinoos.
When it comes to major EUR crosses like EURGBP and EURCHF, they do not see the need for forecast changes at this juncture.
The bank’s original 0.88 3m and 0.90 12m EURGBP targets still seem reasonable, “given that since we made those forecasts in March GBP too has had positive news,” says Jalinoos.
