“We see EUR/USD around current levels on a 1-3M horizon but stress that risks are on the downside in the very near term with a key risk being the appointment of a more hawkish Fed Chair” - Christin Tuxen.Strategists at Nordic lender Danske Bank have lowered their forecasts for the Euro-to-Dollar rate through the rest of the year but have reiterated their bullish view of the common currency in 2018.

The changes come in response to an Autumn rebound by the greenback, which has seen the 1.1700 level develop a magnetic pull, ensuring the Euro-to-Dollar pair can only pull away from it for so long before being brought back to earth.

“US data has taken a marked turn for the better in recent months and our quantitative business cycle models suggest that the US economy is set to recover in H2,” says Christin Tuxen, Chief Analyst at Danske Bank.

This comes in contrast to the situation in the Eurozone where momentum behind the strong rebound observed in the first half of the year has been seen waning in the second half.

“The eurozone has seemingly lost some growth momentum recently and our models suggest this will continue near term. ‘Euro optimism’ brewed in the spring but could be somewhat derailed by the Catalan issue,” Tuxen notes.

Divergences in the extent to which changes in relative monetary policies are priced into markets is also a factor at play in the outcome of Tuxen’s latest forecast review.

“The ECB started to flirt with exit discussions in the early summer and seems increasingly willing to accept currency strength if backed by an improved domestic outlook,” Tuxen says.

Tuxen emphasises that, in Europe, it is not so much a question of when the first rate hike will come that is important for markets but the overall direction of policy that will drive the Euro - which is considerably undervalued on a purchasing power parity basis.

The Federal Reserve, on the other hand, may well be headed toward a December rate hike but this is already priced into the market with an 80% probability.

“The Danske Bank G10 MEVA model suggests that the fair value for the cross is around 1.27; PPP at 1.30,” Tuxen says.

In addition, the equity portfolio flows that played such a large role in the acceleration of the Euro during the first half of the year may well emerge as a renewed driver of upside for the common currency toward year end.

“Our equity strategists expect a eurozone equity outperformance. The euro area current-account surplus versus a US deficit implies that the ’natural’ flow remains EUR/USD positive,” says Tuxen.

Danske Bank now forecasts the Euro-to-Dollar rate will stay around the current level over the next one to three months or so, with Tuxen’s one month target moved down a full big figure to 1.1700 while the three month number has notched up a handle to 1.1900.

“We see EUR/USD around current levels on a 1-3M horizon but stress that risks are on the downside in the very near term with a key risk being the appointment of a more hawkish Fed Chair,” Tuxen says.

The 1.1600 threshold should provide considerable support in the event of a renewed fall in the currency pair.

“We continue to stress that a 2018 rebound towards 1.25 is on the cards and that upside risks dominate the longer-term outlook,” Tuxen concludes.

The Euro-to-Dollar rate fell 0.35% to 1.1752 during the London session Tuesday. It is up some 11.86% for the year to date.