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EURUSD: Likely to bottom in early 2016 – Danske Bank

FXStreet (Delhi) – Christin Tuxen, Senior Analyst at Danske Bank, expects that a tightening – yet soft – Fed combined with an ECB that will be facing a swift closing of the euro-zone output gap and an associated pick-up in core inflation suggests that EUR/USD will bottom in early 2016 and see a period of range trading.

Key Quotes

“The data surprise gap between the euro area and the US has become slightly more EUR positive recently. A stabilisation in the wedge has been seen in recent months as both US and euro-area data have come out broadly in line with expectations.”

“US data have generally confirmed that the economy - including the labour market - is in decent shape, and household real income growth is set to be a source of US strength in H2. Euro-zone growth is currently notably supported by past EUR weakness.”

“Speculators remain net long USD but much less so than was the case in late 2014. At the same time, EUR shorts have been covered from early-2015 highs.”

“We maintain that EUR/USD is set to move slightly lower on relative rates on a 3M horizon: first, the market is still not prepared for a December rate rise and, second, the pricing of an extended ECB QE programme will take place heading into 2016 and should weigh on the euro over the autumn. However, we emphasise that both Fed and ECB support to a lower EUR/USD could prove short-lived.”

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