The market is too optimistic on the euro – Deutsche Bank

Deutsche Bank expects the euro to fall back to 1.08 by year end.

They mainly take issue with the dollar side of the trade, noting that most G10 central banks are priced to converge to a terminal rate of around 2-3%. By virtue of the Fed having the most to cut, the dollar is priced to no
longer to be a high-yielder by next year.

They disagree with this and think the US economy will stay strong and that he US dollar won’t lose its premium as the economy outperforms.

“High-frequency labour indicators are fine;
fiscal policy remains easy; corporate and household balance sheets are at the
healthiest levels since the 1960s,” DB writes.

On the flipside, Europe is struggling and that will be compounded by China woes.

“With Germany
de-industrializing, the risks are skewed towards a delayed adjustment in
the labour market, prompting a faster ECB easing cycle than priced, while the
odds of another French election remain material. In the meantime, Europe is
facing an increased export
shock from China, with price competitiveness (and by extension the exchange
rate) being a key driver. Putting it all together, it should be no surprise
that when the German export base is challenged, it is extremely unusual for
EURUSD to be able to rally.”

Further, they think the US dollar could outperform with a Trump victory and that the upfront easing from the Fed takes away tail risks around a US growth undershoot.

This article was written by Adam Button at www.forexlive.com.