The EUR/USD hit in January the highest levels in months. Analysts at Danske Bank point out their topside risk scenario to the pair has played out. Near-term they acknowledge the risk of this continuing, meanwhile, further ahead they believe too much positivity is priced into the EUR and that markets underestimate the re-tightening potential of financial conditions.

EUR optimism is strong, but eventually set to fade

“We still pencil in Fed hiking policy rates above 5.0% in Q1 and think the inversion embedded into the US curve for H2 2023 is overdone. Markets still price in c. 150bp more of ECB rate hikes, which is more than our base case, although we acknowledge the risk of ECB delivering more. In our view, continued tightening must ensure a re-tightening of financial conditions. This should act as a negative for EUR/USD on 3-6M.”

“EUR/USD remains overvalued on a 1-3Y horizon and unless we see global growth persistently accelerate risks are eventually skewed towards a setback. We lift our profile but still pencil in a lower cross on 3-12M, forecasting the cross at 1.03 in 12M.”