Euro-Dollar Exchange Rate "Still has Room for Appreciation" - Amundi

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What is the outlook for the Euro in light of recent economic development? Still positive says Europe's largest asset manager.

"EUR/USD still has room for appreciation," says Silvia Di Silvio, Fixed Income and FX Strategist with Amundi, Europe's largest asset manager.

The call comes in the same week the Euro-to-Dollar exchange rate dipped below the key 1.20 level amidst a period of US dollar outperformance, leading many to question whether the single-currency is now destined to struggle.

For Di Silvio, the fundamental underpinnings that would make for a Euro recovery are however intact.

"The Eurozone’s macro backdrop remains one of growth above potential, with the ECB on the path of continuing to reduce monetary policy accommodation, albeit at a very gradual pace," says Di Silvio.

We have noted a number of analysts have called time on Euro strength, in the short-term at least, arguing that Eurozone data is unlikely to prompt the ECB into any actions that might support the currency.

But, currency valuation is favourable as Amundi’s fair value for EUR/USD stands at 1.28, a level that they also target over a 12 months horizon. Triggers for a shift higher of the currency (from the current 1.20-1.25 to 1.25-1.30 range) are very much reliant on Eurozone’s macro data.

"The recent softening on PMI indicators and industrial production has raised some concerns that the economic activity might be showing early signs of a slowdown. We think this is not the case and we tend to see such a softening on macro data as temporary. Next core CPI readings will be key in assessing market’s expectations on the next moves of the European Central Bank, and on the Euro," says Di Silvio.

The overall stance at the ECB remains broadly accommodative but Amundi maintain an assumption of a gradual tapering of the ECB's Asset Purchase Programme (APP) in Q4 and the first rate hike in mid-2019.

Above: The ECB's asset purchase programme is winding down, and this has provided support to the Euro over recent months.

The ECB is expected to question the recent deterioration seen in Eurozone data releases and Amundi believe it could wait until July to clarify its monetary strategy.

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