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The euro is expected to rise to 1.26 level against the greenback by December 2019, according to a recent report from Citi Bank. The 1.05-1.15 range pertaining from May 2015 to June 2017 now becomes a triple bottom, targeting 1.25-1.28 albeit by mid-2019.
EUR supports include a still low Real Effective Exchange Rate (REER) level, large current account surplus, equity market inflows, Euro Area cyclical recovery above expectations and a related turn less accommodative by the ECB. In addition, reserve managers may be underweight EUR given a fall in the EUR share in recent years.
EUR yields rise faster than expected. Stronger FDI and reserve manager related buying. ECB turn more hawkish including earlier than expected rate hikes or guidance. Downside risks for EUR: Stronger US fiscal stimulus/ tax cuts. Real yields in the US rise faster than expected on Fed taper. ECB resistance to EUR appreciation stronger than anticipated. Italian Elections generate anti–Euro government. ECB taper is mismanaged and periphery spreads widen, pressuring banks.
"Upside EUR/USD pressure may face resistance from the ECB but it is hard to see rate cuts or delayed QE tapering as a result. US fiscal stimulus could boost US yields and repatriation may also boost the dolalr but we now see this as more likely a rally in a USD bear market than a trend move lower in EUR," the report said.
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