Today, we will focus on the forecast of EUR/USD in the mid-term horizon checking some key indicators
Where the EUR/USD heading ?
Technically the EUR/USD is on a bearish trend since June 21. The pairs reached a low on 7th of March @ 1.0806, since then the EUR rallied within a short uptrend canal within the long-term canal as talks between Russia and Ukraine help to improve sentiment.
The other big part of the story we need to consider is the policy shift from ECB triggered by raising inflation.
Deutsche Bank AG said market is still underpricing the effect of the policy shift. Futures traders are pricing 0% deposit rate by end of December (- 0.5% today). The change in ECB tone is a major change as ECB keep negative key rate since 2014.
Risk reversal
The one-week risk reversal, is a key barometer of market sentiment and positioning in FX options market. It drops significantly the day Russia invades Ukraine, then soar to be almost positive as of today. That means, investors see much less downside risk for the EUR than few weeks ago.
EUR/USD and rate differential
As you can see on the bellow chart, the short uptrend we observe since 7th march is positively correlated with U.S / German 2y bond, so the EUR raise despite the soar of U.S yield. Maybe a sign that EUR/USD has fully priced the interest rate hikes schedule from the FED.
Euro advances late even as rate differentials widen in favour of Greenback
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EUR on the rise
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EUR on the down
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Underpriced E.U inflation
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Downturn in Ukraine war
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Underpriced ECB hiking rate schedule
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Underpriced FED hiking schedule
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