EUR/USD: Danske bank recommends long-term buys of the pair for 2019

On Friday, we mentioned Danske bank's top forex trades for 2019. Today we will examine the EUR/USD purchase recommendation in detail.

The cyclical wave will turn with a possible trade agreement between the United States and China.

In 2017, an upward correction of the EUR/USD came into play, but it derailed in 2018 due to Trump's taxes and the ECB's dovish forward guidance. In our opinion, 2019 could be the year of a return of the EUR/USD's rebound.

From a cyclical point of view, the United States has entered 2019 in a much stronger way than the euro zone, and carry trade should remain a key source of support for the dollar. This will limit the rise of the EUR/USD in the short term.

However, as we move into Q1, we see risks moving towards surprises in terms of economic data that is more favourable to the euro zone than the United States. This should be particularly true if a Sino-US trade agreement is reached (probably mid-2019), as this would imply (1) clear skies for growth in China and the euro zone and (2) depreciating pressure by the USD.

In addition, fiscal policy will support the United States in 2019, but fiscal stimulus will also boost euro area growth next year.

Divergence between the ECB and the Fed is finally weakening and the era of negative rates is coming to an end.

In addition, we are also getting closer to a time when the gap between the Fed and the ECB is coming to an end, with potential implications for currencies. Indeed, the evolution of US Dollar prices over past Fed cycles suggests that it is when the easing stops slowing down that the appreciation of the currency tends to occur. In 2019, the ECB will end its easing efforts (end of QE) as the Fed approaches the end of its rate hikes.

Also key: it now seems that the "political will" to end the era of negative rates is rather high in Europe. And the end of negative rates in the euro zone should encourage reserve managers to buy eurozone debt and thus generate positive flows for the EUR, even if the potential for higher rates above the zero line remains limited.

Lastly, the risk of a recession in the United States is expected to persist over the course of the year and the relative rate factor should dominate any positive push of the USD due to a risk factor, as (1) Fed hikes would be probably anticipated and (2) the USD has lost its appeal as a refuge currency.

Enter a long-term EUR/USD bullish position

We are therefore fundamentally preparing for a significant rebound of the EUR/USD, the main trigger of which would be a drastic change in forecasts for the future of the ECB and/or a trade agreement between the United States and China.

In the near term, the EUR/USD is expected to move in a range around 1.13, with risks once again weighing on the USD strength due to expectations of Fed rate hikes. But we think that the USD bullish bullish position will limit the EUR/USD's drop.

The main risks for this trade are the "normalisation" of the ECB which would once again go off the rails, the absence of a trade agreement and/or an Italian debt crisis.