We have published a new baseline and two alternative forecasts for EUR/USD, along with our updated scenarios for oil, gas, inflation and rates in the US and eurozone. We do see some upside risks for Brent after a potentially overdone selloff, but still expect it to stay below 90$/bbl in the third quarter, allowing FX to keep desensitising from energy prices. In line with our dovish Fed call (no hikes) relative to pricing, we are expecting USD depreciation in the third and fourth quarters, albeit at a moderate pace. Our new year-end target for EUR/USD is 1.18.
Yesterday, ECB Chief Economist Philip Lane suggested the new neutral rate may be 2.50%, effectively suggesting another 25bp hike would still fall short of restrictive territory. But that is hardly surprising for a market that has been fully pricing a 50bp+ tightening cycle almost uninterruptedly since mid-March.
We are in an environment of rapidly shifting correlations, with oil prices becoming an almost irrelevant driver and Fed rate expectations aggressively taking over. That reduces the explanatory power of valuation models, although it’s still worth mentioning that ours returns a 1.160 short-term fair value for EUR/USD. But for now, EUR bulls will likely be content if the pair holds above 1.140.
In other European markets, we had two rate holds in Switzerland and Norway yesterday. We still expect the Swiss National Bank to keep rates at 0.0% for at least another two years, while we forecast a 25bp Norges Bank rate hike in August.
Francesco Pesole