See the latest Australian dollar analysis here:
Morgan Stanley joining the chorus:
EUR/USD has hit our short-term target of 1.14, and we are extending it to 1.12. The USD has been grinding higher for most of the year, but the November 10 US CPI print for the month of October has sparked a more accelerated pace of EUR/USD downside in the past few trading sessions.
The likelihood of stronger US data relative to the Eurozone in 4Q was a key reason behind our expectation for a lower EUR/USD into year end. As Exhibit 1 shows, recent data surprises have been favouring the USD relative to the EUR. Our US economics team has been expecting stronger data following the decline in COVID-19 cases from the highs over the summer, while in Europe cases have been rising sharply as we head into the winter months. Various European nations have announced new restrictions on activity recently (see here), and while the impact on growth may be more marginal relative to previous waves, it nonetheless supports our call for a lower EUR/USD.
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Our recently published FX forecasts as part of our Global Year Ahead Outlook suggest that EUR/USD can fall as low as 1.12, with DXY hitting 97 and is consistent with a further widening in UST vs Bund yields, which has already been pushing EUR/USD lower recently (see Exhibit 2). The recent pace of EUR/USD declines has been relatively rapid, yet our forecasts are consistent with gradual gains.
One reason for not expecting rapid moves from here is that short EUR/USD positioning, as measured by our FX options positioning tracker, is becoming increasingly extended (see Exhibit 2). A further increase in EUR shorts from current levels would take short EUR/USD positioning to levels not see since the early days of the pandemic in 2020.