In the first quarter, the US economic growth weakened; however, there are signals that the growth is rebounding the second quarter mainly with the help of private consumption. Manufacturing, in the mean time has stabilized that is been underpinned by a weaker dollar. Data from Europe has been above expectations; however, recent weakness in UK data might gradually pass on the euro area. Moreover, certain weakness is expected in the coming month, noted Danske Bank in a research note.
The European Central Bank eased its monetary policy in early March; however, it particularly changed its focus to the bank-lending/credit channel. But during its April meeting, the ECB president Mario Draghi, in a subtle manner opened a possibility for a rate cut. The door for further rate cut is not expected to have been closed completely, but the central bank is still likely to prefer other instruments, added Danske Bank. Meanwhile, the US Fed is expected to keep the policy on hold in the near term and hike in September.
“While this is close to market pricing for 2016, we maintain that there is some upside to short-end US rates as pricing for 2017 remains subdued”, said Danske Bank.
On 3 May, the EUR/USD pair had reached a temporary peak above 1.16; however, the pair has moved slightly lower since then. There are downside risks in the near term, according to Danske Bank. The market is very negative regarding the US economy, while the risk of UK exiting the EU will weigh on the currency pair up to June 23.
“We keep our forecast profile unchanged, which leaves some downside near term (1-3M forecast at 1.12, which is based on no Brexit) followed by a sustained move higher towards 1.18 in 12M as valuation and the US-Europe current account differential should support a higher EUR/USD over the medium term”, added Danske Bank.
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