EUR/USD: Bulls will need to stay patient – CIBC

Analysts at CIBC, consider that long term, risks for EUR/USD are to the upside, considering EZ current account and the future tightening from the European Central Bank. They see EUR/USD at 1.18 in Q4 and at 1.23 in Q2 2019. 

Key Quotes: 

“Our message to EUR bulls is simple –patience is a virtue. We’ve been on record for some time now with our call that the EUR rally is likely on hold until early 2019. That’s reflective of the ongoing divergence between US and European growth outlooks, and the softness in Euro core
CPI. Additionally, the situation in Italy should continue to drag on for a few months as the EU Commission is expected to deem Italy’s budget as non-compliant, leading to a few months of negotiating, infighting and headlines that widen BTP-Bund spreads.”

“Investors shouldn’t pull the plug on the EUR just yet. For one, core CPI should shift higher in the coming months given the move in the output gap and firmness in negotiated wage rates of late. Even if Italian spreads widen, there’s little appetite in Italy to exit the monetary union; ‘Quitaly’ is not happening. Given the massive sovereign debt overhang and the potential costs of ballooning spreads, the governing coalition in Rome is limited in how far it can fight the EU on the budget.”

“The market is taking note as well with EUR/USD sensitivity to widening spreads now on the decline. Sure, there are risk events to watch for. State elections in Germany along with a CDU party vote on Merkel on December 6th will keep things dicey. Nonetheless, longerterm tailwinds from a healthy current account and a future ECB monetary tightening should keep EUR risks to the upside.”