Due to markets expectations about de-escalation of the trade war, speculation on a further decreasing interest rate gap between the US and the EMU, EUR/USD could rise further in the short-term. After this, we foresee growing disappointment with the de-escalation of the trade war and growing awareness of the adverse impact of Brexit on economic growth. This would fuel renewed mistrust of the European economy and create more demand for dollars as a safe-haven currency. In addition, the dollar will continue to be appealing for a long time to come, given the negative interest rates in Europe and the positive interest rates in the US. This is why we currently believe that EUR/USD will, on balance, decline further to 1.05 or lower in the coming quarters. We would normally expect a greater decline. However, we believe that the central banks will continue to reduce their dollar reserves. In addition, the interest rate differential will continue to shrink to the detriment of the dollar.
We expect EUR/USD will rise to approximately 1.15 in the coming weeks to months due to, among other things, less safe haven demand for dollars and lower interest rate differentials between dollar and euro interest rates. Any interim declines are unlikely to go far below 1.10. A decline below 1.08 would break this scenario and indicate a further decline. However, an increase above 1.125 would confirm the scenario of a further rise to roughly 1.15.
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