“Our FX Drivers model also shows an increased sensitivity of currency markets to policy generally, as well as some specific cases.
…but other factors matter. EUR/USD stands out as driven by policy, with the ECB-Fed divergence pointing lower for the pair,” MS argues.
“However, we suggest other factors – the global risk environment and commodity market performance – also need to be taken into account to identify specific opportunities and risks in FX markets. This is even the case for EUR/USD. A more challenging risk environment and increased asset market volatility could limit EUR/USD downside,” MS adds.
“Even a EUR/USD rebound is possible in a market risk-off event given the EUR’s inverse relationship to asset markets. We are cautiously bearish EUR/USD as our targets are approached,” MS advises.
MS targets EUR/USD at 1.06 by year-end and at 1.03 by Q1’16.
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