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The Euro has pushed to its highest level since the 1st of July on Tuesday, and further gains all the way to 1.10 cannot be ruled out says a major European bank.
Analysts at DNB - the Denmark-based lender and investment banking provider - say recent foreign exchange market moves suggest, "the US dollar rally is approaching an end".
The Euro to Dollar exchange rate (EUR/USD) reached a high of 1.0477 on Tuesday amidst an ongoing capitulation in the Dollar, which was triggered following the release of softer-than-expected U.S. inflation data last Thursday.
The gains already put the pair within touching distance of the 1.05 level that our week ahead forecast identified as being a potential target over a near-term timeframe.
EUR/USD rose 3.7% last week and is an additional 1.10% higher already this week as investors bet the Federal Reserve will slow down its interest rate hiking cycle as U.S. inflation shows signs of peaking.
Peak Dollar would imply the EUR/USD's lows are now on the chart and DNB says the risk is that EUR/USD will not trade as low as 0.95 in the coming three months, which was their three-month forecast for the pair.
The Euro's recovery against the Dollar has been sharp, most likely as a result of a sizeable clear-out of 'long' dollar positions which were engaged by investors looking to profit on the Dollar's multi-month rally.
"The question is how much higher than this EURUSD could trade. This, in turn, we believe depends mostly on the outlook for risk appetite. If it continues to improve, EURUSD will likely rise further from here, and could easily reach 1.10 or higher in three months," says Ingvild Borgen, an analyst at DNB's markets division.
Global equity markets are riding the 'Fed pivot' wave and recovering as investors look forward to 2023 when the Federal Reserve is expected to end its hiking cycle.
Risks to the outlook include a sharper-than-expected U.S. recession, which would typically be expected to support the safe-haven Dollar.
"If, on the other hand, global equity markets drop sharply as the US economy is moving closer to a recession, while the Fed continues to hike interest rates to combat the high inflation, EURUSD is likely to drop below parity again," says Borgen.
"As we are leaning towards the latter as the most likely scenario in the short to medium term, we do not believe EURUSD will continue to rise sharply further in the short- to medium term, but instead continue to trade in the 0.97-1.05 range in the coming three months as well," she adds.
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