EUR/USD fundamentally supported – Danske Bank

EUR/USD moved towards 1.2450 on the announcement of QE flexibility being removed, and also initially pressed higher still as Draghi did not come out as soft as expected at first, notes Senior Analyst, Mikael Olai Milhøj at Danske Bank.

Key Quotes

“With Draghi framing the change in language as a natural step given the ‘strong’ outlook – and thus the move not representing that the ECB is in a hurry to ‘exit’ as such – the EUR/USD rally faded somewhat. Thus, the year-to-date high of 1.2555 was not at risk today. Despite some brief comments on the challenges arising from a stronger currency, we think that today’s shift in forward guidance, while not in itself a trigger for a new EUR uptrend, will keep alive FX markets’ belief in the ECB keeping up the pace in its gradual move towards the 'exit'.”

“The potential for this to support the single currency, not only from a relative rates point of view but also from a capital flow point of view, still holds EUR upside. Further, with omnipresent arguments for USD weakness, it leaves EUR/USD fundamentally supported. In our view, this leaves the 1.21-1.26 range for the pair intact for now, but the cross is set to continue to grind higher further out. A possible trigger for this could be the ECB looking to adjust its rates communication which could happen later this year.”