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The euro has extended its losses against the US dollar, to the tune of almost 6 percent since mid-April (1.24). Political uncertainty in Italy and Germany, a ‘dovish’ European Central Bank (ECB), ‘hawkish’ Federal Reserve (Fed), and the risk of an escalation in U.S.-EU 'trade wars' have been key factors weighing on EUR/USD, according to the latest research report from Lloyds Bank.
However, having repeatedly tested and held the 1.15 level, it is believed the pair could rally from here. The political climate across Europe has calmed somewhat and recent data appear firmer. Moreover, with market pricing already pointing to further hikes, the ability of US rates to drive USD strength appears limited.
Meanwhile, the latest guidance from ECB Council members suggests a first rate rise in September 2019 is a realistic prospect. This is ahead of market pricing but in line with the forecast. As such, interest rate dynamics are expected to prove increasingly supportive for the EUR/USD.
In contrast, US President Trump’s trade-related threat to the European auto sector, and the increased risk of elevated tensions between the US and EU could increase bearish sentiment ahead of the US mid-term elections in November.
"However, with our fundamental models estimating EUR/USD ‘fair value’ at around 1.22, we remain broadly positive on the euro’s prospects, forecasting 1.25 for year-end," the report added.
