Long EUR/USD: Move to at least 1.15 over the next 3-4 months - Nomura

The research team at Nomura expects to see a breakout from the EUR/USD current range and the euro to trade higher for the balance of the year and therefore suggests to be long EUR/USD looking for a move to at least 1.15 over the next 3-4 months. 

Key Quotes

“One reason is less fundamental. The last time the euro behaved similar to now, that is trading in a range for a protracted time, was in 2000-02. That was when the dollar was in the midst of a multi-year turn (from strengthening to weakening). Currently, we believe a multi-year dollar downtrend is also in the making. On top of that, the euro is in its tightest range over any two-year period going back to the 1970s. Both these observations suggest the timing is ripe for the euro to participate in the new dollar downtrend.” 

“The macro picture should certainly help. Euro-area inflation reached a trough in early 2015, stabilised over the rest of 2015 and 2016, but has started to gather pace in recent months. The latest core inflation, for April, came out at 1.2% (y-o-y) – its highest level since mid-2013. This should embolden the ECB to begin talking about tapering its quantitative programme over the summer months. It would also mark the reversal of the extraordinary easing measures the ECB started in 2014 with negative rates and later QE. That phase coincided with the euro plunging from 1.40 to 1.05. Therefore, its unwind should see the euro reverse some of that decline.” 

“Meanwhile, the effect of the Fed’s tightening on the dollar appears to be waning. The Fed has hiked twice since December and the euro has actually risen over 2%. US data, both growth and inflation, have also disappointed, and this may encourage the Fed to hike over the summer months.”

“Finally, Germany has the largest current account surplus in the world and the US has one of the largest deficits with the euro area. Some combination of a stronger euro, more European imports from the US and less European exports to the US would be needed to narrow the trade deficit. With the Trump administration having started various trade investigations, imposed tariffs on lumber imports from Canada and the US trade representative, Robert Lighthizer, soon to be appointed, markets may soon start to focus on any required weakness in the dollar (strength in euro) to correct trade imbalances. Thus, the duration of the current range, the European macro recovery, a cautious Fed and trade imbalances all point to meaningful strength in the euro over the coming 3-4 months.”