Morgan Stanley's bullish euro forecast (say the ECB will have to tolerate strength)

Morgan Stanley's thoughts on the euro appreciation, and their 'bottom line'

• EUR has appreciated notably, though this is largely due to 'good' reasons - better growth prospects, waning political risks, and the prospects for gradual policy normalization from the ECB.
• Thus, we think the ECB will have to tolerate EUR appreciation to an extent. It is unlikely to push back unless the pace becomes undesirably aggressive, inflation expectations decline, or the appreciation impacts ECB staff forecasts for inflation materially.
• We note that the pace of recent appreciation is fairly high by historical standards and, if such a pace continues, the ECB will be increasingly likely to try to blunt the speed of its rise, though it will ultimately have to tolerate EUR strength over time.
• Draghi's speech at the Jackson Hole Symposium offers a potential venue to take action, pushing EURUSD lower and thus offering a compelling buying opportunity.
• We see our EURUSD bull case forecast of 1.28 over the next 12 months as increasingly plausible.