EUR/USD: U-Shaped: Themes, Targets, & Tech Setup - BofA Merrill
Themes: Trump-driven in H1, Draghi-driven in H2
It is all about the USD for now. We expect US fiscal stimulus, which together with political risks in Europe should help weaken the EUR in H1. Although we remain positive on France, investors will hedge the French elections following Brexit and Trump surprise wins. We expect ECB constraints to become a more important driver and strengthen the EUR in H2. The market took the reduction of the ECB QE monthly purchases last December well, but this was the beginning of the end for QE, in our view.
The EUR is undervalued by only 2% in trade weighted terms, but by 9.6% vs. the USD. The EUR is cheap against NZD, CHF and JPY and expensive against NOK and SEK, based on our equilibrium estimates. The Eurozone data is good and getting better. The market EUR position is broadly neutral.
Forecasts: U-shaped.
We expect EUR/USD to weaken to 1.02 by mid-2017. Risks to this projection appear balanced. Expecting the ECB to taper QE towards the end of the year, we see the EUR strengthening in H2, going back to 1.05 by end 2017 and to 1.10 in 2018, with upside risks.
Tech Setup:
Spot breakdowns, technical patterns and momentum lean bearish.
The new lows starting 1Q17 and February's trend line breakdown formed a bearish flag.
Greater downside is more likely, provided EUR/USD remains below 1.08.
Support: 1.0490, 1.0350, 1.0025. Resistance: 1.08, 1.1025 and 1.1320.
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