EUR/USD: Outlook is skewed to the upside – Lloyds Bank

Analysts at Lloyds Bank, points out that over the past month a generally weak US dollar, the outcome of the Dutch general election and speculation around higher ECB policy rates have pushed EUR/USD close to its year-to-date high around 1.08.

Key Quotes

“Still, European politics is likely to remain a key source of downside risk for the euro with elections in France and Germany later this year arguably representing more notable flashpoints over the coming months. Add to this renewed concerns over the outlook for Greece, an extended period of ECB QE and a steady increase in US interest rates, the line of least resistance is for the euro to weaken in the near term. But a lot of this is already factored in. In the absence of a more aggressive pace of Fed tightening or a more precipitous rise in European political risk, we believe the outlook for EUR/USD is skewed to the upside and look for a rise towards 1.10 by year end.”

“Moreover, over the medium- to longer-term we believe the euro looks undervalued. Fundamental estimates of fair value for EUR/USD centre around 1.20. But it is likely to take a sustained rise in ‘core’ euro area inflation, continued signs of economic recovery and a narrowing in interest rate spreads to push the euro meaningfully higher.”