EUR/USD: Optimism on the horizon – CIBC

Apart from the risk of resumed trade tensions with the US, analysts at CIBC are beginning to see stabilization in major Eurozone economies. According to them, improving sentiment at home and abroad, alongside prospects of fiscal stimulus, should see the euro strengthen this year. They forecast EUR/USD will rise to 1.15 during the second quarter. 

Key Quotes: 

“Since the start of Q4 2019, we’ve seen the eurozone’s economic surprise index maintain a strong upward trajectory. The gradual easing of global trade tensions have and should continue to provide a disproportionate benefit to German activity. Accordingly, there’s been a moderate improvement in German business sentiment, as LFO expectations appear to be on course to test 2019 highs. Improving corporate and consumer sentiment underlines prospects for the eurozone economy picking up some momentum throughout 2020. However, even if the economy marginally accelerates in Q4 following two consecutive quarters of merely 0.2% GDP growth, base effects could see annual GDP remain unchanged into the end of the year.”

“The ongoing improvement in sentiment indicators and global risk dynamics point towards an extended compression in UST-Bund spreads. German 10-year yields have climbed by more than 50bps over the last four months, and the uptrend appears set to extend towards seven-month highs. That should encourage 10-year spreads to compress towards two-year lows of around 200bps. Those prospects of higher German yields and narrowing spreads are consistent with medium-run inflation expectations reaching six-month highs, in excess of 1.40%.”

“While inflation expectations may currently remain well below the current ECB target threshold, the uptrend should help limit fears of additional stimulus. A diminishing US yield advantage, allied to the move in the 1-year EU cross currency basis swap, supports our view of a gradual appreciation in the euro.”