MUFG expects EUR/USD to climb back toward the top of its 1.1400-1.1800 range rather than break lower. Improving business confidence and resilient euro area growth data are seen limiting further downside for the euro after months of selling pressure.
MUFG expects EUR/USD to recover toward the top of its 1.1400-1.1800 range, arguing that euro area growth is proving more resilient than feared and that business confidence is recovering from the energy shock. The pair is trading just above 1.1400, testing the base of the range that has held for the past year after failing to break lower on a sustained basis last month.
Why the euro fell
The euro faced persistent selling pressure in recent months, driven first by the hit to investor sentiment from the energy price shock and, more recently, by scaled-back expectations for further ECB rate hikes. Euro area data significantly undershot expectations in the first two to three months of the conflict.
Confidence and growth turn
There are signs the worst of that shock may be passing. The final composite business confidence reading climbed back to 50.0 in June from a May low of 48.5, though it remains below the near 52.0 level seen in February before the US-Iran conflict began. Stronger than expected industrial production from France and Spain for May, together with upward revisions to April data, prompted an upgrade to Q2 GDP growth expectations to 0.25% from a prior forecast of near stagnation.
That resilience is seen as a supportive factor for the euro, capping further selling while a faster unwind of the energy shock lifts sentiment toward the currency.
The September rate call
A final 25 basis point ECB rate hike in September is still assumed, even as upside inflation risks have eased, with officials including Chief Economist Philip Lane continuing to signal another move remains possible. MUFG cautions that a September hike is far from certain, but the mix of improving growth momentum and one possible increase gives the euro a more constructive backdrop than it has had for much of the conflict period.
Source: investingLive
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