Home Forex Analysis And Forecasts This Is The EUR/USD Top; Here Is Why? - Morgan Stanley

This Is The EUR/USD Top; Here Is Why? – Morgan Stanley

In its weekly FX note to clients today, Morgan Stanley argues that the EUR/USD has already a top in place as the USD has turned around, completing its downward correction within a secular bull trend. The following are some of the main reasons that MS outlines behind this argument along with its latest EUR/USD forecasts.

ECB keeps transmission channels open:

"Risk appetite remains the key variable for judging the EUR. The EUR’s funding status suggests repatriation related inflows will occur when investors reduce risk exposure, while rallying equity markets would push the EUR lower. The ECB is primarily relying on two transmission channels for its nonstandard monetary policy measures, we believe: i) higher portfolio valuations potentially unleashing demand via wealth effects, and ii) a lower EUR shifting relative competitiveness in favour of the eurozone," MS argues.

EURUSD

The ECB, the EUR and risk:

"High bond market volatility can block these channels by weakening the outlook for risky assets, while simultaneously pushing the EUR higher. At this stage the EMU economic recovery seems too fragile for the ECB to allow monetary transmission to weaken. Hence, we would expect the bank to verbally intervene whenever it feels it has to unlock these channels. This weekend’s ECB Forum provides a platform to communicate with markets," MS adds.

Positioning for US rebound:

"Otherwise, it will be potential US data strength that steers the outlook for the USD…Our analysis indicates both the USD and GBP are in a strong position. EUR weakness should be steered by the ECB and its attempt to keep monetary transmission intact," MS projects.

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EUR/USD forecasts:

MS maintains its EUR/USD forecasts at 1.04 by Q2-end, 1.03 by Q3-end, and 0.98 by year-end.

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