EUR/USD faces downside risks – Danske Bank

Jens Sorensen, Chief Analyst at Danske Bank, expects the pair to remain within a consolidative theme in the next months, but risks remain to the downside in the very near term.

Key Quotes

“EUR/USD paid a short visit to the 1.1850 area yesterday but edged lower again following the decent US CPI release. The EUR has notably followed CHF and JPY in appreciating against peers in recent days on the back of sour risk sentiment”.

“We are not convinced that this will continue to act as a positive for EUR/USD in an environment where we still see the Fed on track to hike in December. Also, we see risks skewed to the upside in terms of the stimulatory outcome of a US tax reform”.

“Moreover, we think it is too early for the market to test levels in the cross above what was seen just before the dovish ECB tapering announcement in late October, i.e. a move above 1.19 would in our view require more of ‘the ECBs easing-is-not-forever talk’ seen last week, and notably Mario Draghi refrained from that when speaking earlier in the week”.

“Thus, we still see the 1.1479-1.1880 range laid out towards year-end as valid and stress that risks are in our view on the downside in the cross in the very near term as EUR positioning is back at stretched levels, and as relative rates and risk of a wider EURUSD CCS towards year-end suggests that some repressed downside could be released in the cross ahead of year-end”.