Morgan Stanley predicts the EUR/USD exchange rate to fall to 1.02 by the end of the year, driven by defensive investor bias, positive carry, and slow local growth. This trend is somewhat mitigated by the ongoing shift in capital flows.
As local yields rise and FX-hedged returns in the US turn negative, long-term debt outflows are reversing into inflows. Morgan Stanley expects this trend to continue for the next couple of years, given their interest rate forecasts.
However, the bank expects the Euro to outperform its regional peers. They maintain a long-term bullish bias for EUR/GBP, forecasting it to rise above 0.90 over the next 12 months as capital repatriation into Europe significantly contrasts with the lukewarm investor demand for UK investments.
Meanwhile, the bank expects EUR/CHF to marginally increase towards parity, with the Euro's positivity partly countered by the defensive allure of the Swiss Franc.
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