The EUR/USD pair bounced on Friday but is again grinding lower and is seeing a retest of the year to date low at 1.1704 from the end of March. Economists at MUFG are maintaining a bearish bias for EUR/USD in the month ahead.
The USD leg is continuing to derive support from Fed’s plans to begin QE tapering
“The US economy is continuing to recover strongly with employment growth picking up in recent months. It leaves the Fed on course to make a QE taper announcement before the end of this year.”
“Long-term US yields have put in place a near-term bottom which is helping to encourage a stronger USD as well. We do not expect upcoming uncertainty over the US debt ceiling to materially weaken the USD in the month ahead.”
“The euro is not benefitting from the improving growth outlook as the ECB has strengthened their commitment to maintain loose monetary policy by adopting a higher hurdle for rate hikes in their new forward guidance. The widening policy divergence between the ECB and Fed will encourage a weaker euro.”
“The German election is scheduled on the 26th September with polls pointing to a closer race. It should garner more market attention early in September and the uncertainty could weigh modestly on the euro, although we view any euro weakness on the back of the German election as likely to prove temporary.”