EURUSD forward outlook

 FUNDAMENTALLY

Cyclical outlook.

Activity data has stayed up better than anticipated and is not least feared on both sides of the Atlantic. The European energy crisis fears have been lessened by a mild winter, windy weather, and rain, while new industrial optimism has been sparked by China's reopening. The American labor market continues to be far tighter and more robust than the Fed can tolerate. In January, wages skyrocketed back to their pre-COVID trend levels, and ISM services point to a considerably stronger consumption engine than previously anticipated for the months ahead. Overall, this puts central banks in a difficult position where either more is needed right away or longer-term contraction measures must be implemented.

 Monetary policy. We continue to predict that the Fed will increase policy rates by 25 basis points in March and May, pushing them above the 5.0% mark. This price is reasonably priced and includes the first 25 bp rate drop in December. We continue to think that a tight-for-longer policy approach is necessary to give the US labor market some breathing room and, as a result, to bring core inflation down to 2.0%. The ECB continues to suggest that more rate increases are inevitable, but markets are already pricing in more than 100 basis points worth of increases through the summer.

-Fundamentally, Equities should continue to draw foreign investors, and the US should maintain its high(er) interest rate market status. A valuation. To us, the EUR/USD'S fair value over the next three years is in the low 0.90s. At the present time, the value is a drag and serves as the center of gravity for a lower position. The two issues that should be watched that could affect the EUR/USD valuation are the global energy crisis and fiscal policy in the Euro Area. There is an opportunity to estimate the fair value of the EUR/USD at a higher level if the energy crisis eases and/or the Euro Area countries return to a system oriented on fiscal regulations.

Conclusion. 

Based on relative terms of trade, real rates (growth expectations), and relative unit labor costs, we have long argued the strategic case for a lower EUR/USD. The market's realization that financial conditions must tighten, relative rates, and relative asset demand are driving our growing belief that the cross might also move lower on a short-term horizon. European stocks are currently underperforming their peers compared to the time from early January to September, which may be a sign that the EUR/USD has reached its peak. We keep a bottom above parity but slightly lower our downward-sloping profile since we think fresh energy/real rate shocks are necessary to reach the September lows.

TECHNICALLY

From a technical point of view, we recently have taken buy-side liquidity and now, a market structure shift just played out perfectly from our economic point of view. Since our bias is now in favor of the USD, our bias is directed towards sell-side liquidity and that first low is our first sell-side objective, That goes as well with other correlated pairs such as the GBPUSD, and AUDUSD, almost all of them now are being affected by the USD