EUR/USD: CIBC expects pair to climb back to $1.15 in the 2nd Quarter of this year

The EUR/USD is currently showing a clear bearish trend, falling since the very beginning of the month and approaching the major psychological threshold of 1.10, but the situation could improve according to the CIBC bank.

In addition to the risk of renewed trade tensions, CIBC analysts are indeed beginning to see a stabilisation of the major euro zone economies. In their view, improved domestic and international sentiment, as well as prospects for fiscal stimulus, should allow the euro to strengthen in 2020. They expect the eurodollar to rise to 1.15 between April and June.

"Since the beginning of October of last year, we have seen the eurozone's economic surprise index maintain a strong upward trajectory. The gradual easing of global trade tensions has benefited and should continue to benefit German activity disproportionately. As a result, German business sentiment has improved slightly. The improvement in business and consumer sentiment underlines the prospects for some recovery of the euro area economy throughout this current year. However, even if the economy accelerates slightly in the fourth quarter after two consecutive quarters of GDP growth of only 0.2%, base effects could leave annual GDP unchanged until the end of the year".

"The continued improvement in global sentiment indicators and risk dynamics points to a broad compression of UST-Bund spreads. German 10-year yields have risen by more than 45 basis points over the past 3 months, and the upward trend looks set to extend to six-month highs. This should encourage 10-year spreads to compress towards two-year lows of around 200 basis points. These prospects for higher German yields and narrower spreads are consistent with medium-term inflation expectations reaching six-month highs above 1.35%".

"Although inflation expectations may currently remain well below the threshold of the ECB's current target, the upward trend should help to limit fears of a further stimulus. The diminishing yield advantage of the US, combined with the evolution of the one-year EU currency basis swap, reinforces our expectations of a gradual appreciation of the euro".