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#1 28-12-2018 09:31:13

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EUR/USD: the euro likely to progressively climb to 1.20 in 2019 (UOB)

EUR/USD: the euro likely to progressively climb to 1.20 in 2019 (UOB)

UOB says that the ingredients for a more sustainable recovery of the EUR/USD are falling into place for 2019. According to the bank, a recovery of the euro is increasingly likely, with the prospect of transferring expectations of tighter monetary policy from the Fed to the ECB. They see the EUR/USD reaching its low point and gradually rising over the next year, from 1.15 to 1.20.

"The 2.6 billion bond purchase programme officially concluded at the end of 2018. To a certain extent, the massive stimulus package of the European Central Bank (ECB) has maintained the EUR/USD in a 1.05 to 1.25 range since its implementation in early 2015. Thus, as soon as the ECB's balance sheet ceases to expand in 2019, one of the main pressure points against the euro could start to fade.

As policymakers are still largely convinced they know how to overcome the slowdown, the ECB's discussions on its first rate hike will begin in 2019. This should be a key catalyst for the EUR's rise, especially as market expectations for higher interest rates are very modest right now.

The market consensus has not yet taken into account the significant probabilities of a rise in the ECB's rates in 2019. But once the ECB starts to raise rates, this will contrast sharply with US monetary policy because the Fed will have reached the end of its rate hike process at the end of 2019.

With the EUR/USD stabilising around 1.13 in recent weeks, risk reversals have also stabilised and also appear to be increasing. Unless there is a sharp comeback in the EU-Italy budget dispute, the EUR/USD's decline will be limited and the positive factors mentioned above should favour a more sustainable recovery in 2019.

Overall, we see the EUR/USD rising steadily over the next year, from 1.15 in Q1 2019 to 1.20 in Q4 2019.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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