EUR/USD to sustainably move above 1.20 next year and reach the 1.25 level - ING

While the dovish form of the ECB QE tapering and Italian elections should cap the EUR/USD upside and lead to some correction lower in coming months/quarters, they are unlikely to alter the medium-term EUR appreciation trend, according to Petr Krpata, Research Analyst at ING.

Key Quotes

“Once the dovish and the likely more prolonged QE tapering ends, markets should start prepositioning for the normalisation of the depo rate (in the same forward looking manner as the market had been prepositioning for the QE tapering over the past months). This should push EUR/USD higher later next year, towards the 1.25 level.”

“Going forward, one should also expect the EUR/USD upside to be more orderly and not on the scale of the cca 10% rise observed over the last four months. This is because the cross no longer shows the extreme mis-valuation levels it has been showing since the beginning of 2015, hence the scope for an additional abrupt correction is more limited.”

“European FX outperformance to continue for a while yet

The spill-overs from the observed EUR rally are clear and obvious. European currencies (both within the G10 and EM FX segments) benefit vis-à-vis their USD-bloc peers. As long as EUR remains bid in coming weeks, this trend of the past months should remain unchanged, with European FX outperforming the rest of the world.”