EUR/USD to hold more bearish going into the summer months?
As the US-Iran dust settles down for a bit, will diverging economic fundamentals be the name of the game for EUR/USD next? It's certainly a consideration that especially with stagflation risks on the rise in the euro area.
So, what can we look forward to going into the summer for EUR/USD from here?
ING argues that the pair should be headed lower as the dollar looks to come back into favour among currency traders. Adding that with a better positioned US economy, that will help to nudge EUR/USD towards one-year lows potentially.
"It looks like FX markets are entering a period where the dollar will be back in demand. Our house call is that energy prices will remain high or rise further into July as inventory drawdown strategies are questioned. This inflation shock will be with us for longer. With a stable labour market, the Fed will have to delay its easing cycle deep into 2027. Bearish flattening of the yield curve means cyclical dollar strength should be with us through the summer.
Having already hiked to 2.25%, we expect another hike from the ECB either in July or September. But the stagflationary shock will be felt more in the Eurozone than in the US. EUR/USD could be pushed to 1.13/14 in July – but this is not 2022."
Meanwhile, Credit Agricole also holds a similar bearish view but is arguing their outlook from a geopolitical angle. That as they remain skeptical on how the US-Iran framework agreement will play out in the next two months.
However, they do see the downside risks as being more limited now compared to before. As such, they're not looking for EUR/USD to drop too much but potentially back towards the lows from August last year and March this year.
"Hopes for a sustained cessation of hostilities in the Middle East and a reopening of the Strait of Hormuz have sunk global energy prices and helped risk sentiment recover. In contrast, EUR/USD has been unable to hold on to its initial gains in the wake of the announcement of the US- Iran "deal". The pair could remain a sell-on-rallies at current levels, in part because of the lingering geopolitical risks ahead.
It remains uncertain whether the US and Iran would be able to reach a deal at the end of their self-imposed 60-day negotiation period. To the extent that we do see some normalisation of the flow of energy through the Strait of Hormuz, however, this should cut the risk of renewed oil price spikes and thus the risk of significant EUR/USD downside. We thus nudge up our September forecast to 1.14 from 1.12 previously."
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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