The Federal Reserve’s policy together with Danske Bank’s expectations of global macro means that the EUR/USD pair is likely to trade within the 1.18-1.20 range. Risks may be tilted to the upside particularly on a three-month horizon.
The effects of FAIT are not obvious since relative inflation is yet to become a direct relevant factor in the cross for many years. However, the new policy is EUR positive; as the United States is effectively exporting easy financial conditions to the rest of the world.
Currently, the rising global inflation expectations also suppress debt-deflation and political risks that are most prominent in the Eurozone. If the Federal Reserve succeeds in strengthening global demand, it will also find a way to EUR/USD indirectly.
Based on the near-term charts, the focus for the pair turn to the September FOMC meeting, global economic activity; the potential for further US fiscal easing, and the value versus growth rotation in equity markets. These factors might shift EUR/USD around from day-to-day; but it is quite challenging to see a shift to substantial USD appreciation on a 3-month horizon.
“A key thing to keep in mind is that we now see a rise in the broad EUR as weighing somewhat on European equity markets. This may make the ECB reflect and verbally try to intervene against excessively rapid appreciation. Besides, the still somewhat-slow pace of the global economic recovery limits the potential for near-term EUR appreciation. So, 1.25 is likely not in sight right now.”
Shifting the focus further ahead, Europe appears to have an ample supply of internal issues that might matter on a 12-month horizon. However, these EUR negatives can easily disappear since a new pick-up in global market sentiment has come for now.