EUR/USD is undervalued in the medium term – Lloyds Bank

Analysts at Lloyds Bank view the euro as undervalued in the medium term, with fundamental ‘fair value’ centring around $1.20.

Key Quotes

“The euro has been fairly volatile over the past month. The outcome of the Dutch general election, the FOMC’s ‘dovish’ hike, a raft of strong European data, talk of possible tightening in ECB policy, and US President Trump’s failure to repeal Obamacare all assisted the EUR/USD to rally to a new year-to-date high above 1.09. Yet the move has proved unsustainable, as ECB President Draghi and Chief Economist Praet tempered the excitement around potential policy tightening. This has resulted in a sharp pullback, towards 1.05.”

“In the near-term, European politics are likely to remain the key source of downside risk for the euro, with the presidential elections in France a notable focal point. Ongoing concerns over Greece’s financial situation and a continued divergence in US – Eurozone monetary policy may also weigh on EUR/USD. That said, the market is already discounting much of this, and European data continue to improve.”

“Based on our model estimates, we view the euro as undervalued in the medium term, with fundamental ‘fair value’ centring around $1.20. Thus, we look for EUR/USD to rise to 1.10 by year-end, extending to 1.13 by end-2018.”