Image © European Central Bank.
Foreign exchange analysts at Danske Bank update their Euro to Dollar exchange rate (EUR/USD) forecasts and confirm the pair is destined to make a definitive move below parity.
Danske Bank were ranked second by Bloomberg in their G10 forecast rankings for the second quarter of 2022.
"EUR/USD has weakened faster than expected and currently stands at our previous 12m target of 1.00. However, the forces that are in play are likely to continue to weigh on EUR/support USD," says Lars Merklin, Senior Analyst at Danske Bank.
Euro-Dollar reached a low of 1.00, 0.9999 and 1.0005 in three successive sessions this week, highlighting the strong support the Euro is finding here. (Set your FX rate alert here).
Indeed, numerous analysts confirm there is significant interest in the options market at this level and this suggests technical considerations could be in charge of trade in the near-term.
A strong sell-off in the wake of some hotter-than-expected U.S. inflation numbers out Wednesday was soon repelled by technical buyers.
"The mother of all battles is still raging for control of that level, which is acting like a magnet both for buy and sell orders, with massive options expiries distorting the field. Whether it holds might ultimately depend on the path of energy prices, and whether Russia really cuts off the gas to Europe next week," says Marios Hadjikyriacos, Senior Investment Analyst at XM.com.
But, fundamental factors are expected by Danske Bank to ultimately win out.
"Notably, EUR/USD remains overvalued," says Merklin.
Danske Bank estimates 'fair value' for the exchange rate to reside in the 0.90's region as terms-of-trade persistently supports Dollar over the Euro.
The Eurozone has long run a trade surplus with the rest of the world, largely driven by Germany's export might.
However, the war in Ukraine and diminished demand from China owing to Covid-suppressed domestic demand has seen Germany's and the region's surplus slip into deficit.
"Equally, the cyclical slowdown continues to weigh on EUR and stagflation is a real risk," says Merklin.
Danske Bank views risks to their downgrades for the Euro as lying to the downside.
But, a global capital expenditure uptick amid fading inflation is the key upside risk to the Euro.
"We shift our EUR/USD forecast materially lower and thus extend our long-held view of a stronger USD to new levels. Thus, we revise our 12m forecast from 1.00 to 0.95," says Merklin.