EUR/USD likely to trade above 1.10 in 3 month – Danske Bank

Mikael Milhoj, Senior Analyst at Danske Bank, expects the pair to navigate above the 1.10 handle in the near term.

Key Quotes

“A muted relief rally in EUR crosses finally sent EUR/USD above 1.10 following last night’s French election result. The Macron win should dampen eurosceptic risks to the single currency for a while and thus help to sustain the move higher in ranges for EUR/USD in particular seen recently”.

“With euro-area political risks sidelined, focus should return to the fact that Europe is looking surprisingly good cyclically, which will most likely lead the ECB to be somewhat hawkish in terms of communication on policy rates in June, i.e. remove the possibility for rates to go ‘lower’.

“And, with Trump’s policies increasingly diluted and hence set to provide little USD support for the time being, the main driver left to deliver USD support in our base case will be the Fed – and we believe Yellen will be cautious about avoiding just that when announcing ‘quantitative tightening’ .

“Also, it is not obvious that a weaker global business cycle (that we envisage) should necessarily be a USD positive as has been the case historically”.

“On the whole, the French election has implied a level shift in EUR/USD which has admittedly surprised us despite our long-standing call for upside potential in the cross. While we maintain that it will take more firm indications of an ECB exit for the cross to embark on a sustained uptrend, the ranges just off/around 1.10 that we previously pointed to have clearly been wiped out, and the pair is in our view now more likely to stand above than below 1.10 in 3M”.