EUR/USD: Moderate gains for the euro to follow gradual recovery in growth - CIBC

According to analysts at CIBC, the recovery in growth will likely support a strengthening of the Euro. They forecast EUR/USD at 1.16 (Q3 - 2019) and 1.20 (Q1 2020). 

Key Quotes: 

“Retreating macro expectations have compromised ECB rate expectations. We’ve seen front Euribor contracts rallying between 4-8 bps since the start of the year, while the EUR short positional skew has almost doubled in that time.”

“While external trade tensions continue to weigh upon the eurozone, domestic demand dynamics, encouraged by a modest fiscal easing, remain much more resilient. Hence, while German manufacturing sentiment weighs disproportionately upon the pan euro metric, services sentiment is benefitting from rising wage growth. Positive domestic dynamics will likely influence the ECB’s assumptions that the recent retreat in activity is transitory, and set to rebound into H2. Should global trade pressures dissipate into H2, expect this to disproportionately benefit the eurozone via Germany.”

“Against the backdrop of an excessive short positional skew and rising wage pressures, expect the latter to encourage a rebound in core CPI. At the same time, reversing the downtrend in long-run inflation expectations favours a modest but gradual recovery in eurozone growth, implied rate assumptions and for the EUR.”