EUR/USD daily
MUFG continues to support a long position on EUR/USD, targeting a move towards 1.1050. The bank's analysis suggests a more balanced rate cut trajectory between the ECB and the Fed than the market currently anticipates.
Key Points:
- Yield Spread Dynamics: Initially, yield spreads indicated a growing policy divergence favorable to the US, which has recently reversed, aiding the EUR/USD recovery.
- Market Perception vs. Reality: Despite prevalent market expectations of increased divergence with the US potentially favoring further dollar strength, MUFG counters this view, suggesting a closer alignment in policy trajectory between the ECB and the Fed.
- ECB and Fed Rate Cuts: The ECB is expected to cut rates in June but may pause in July. Both central banks are anticipated to have similar rate-cut paths post-summer, with three reductions each this year.
Conclusion:
MUFG’s stance is based on a reevaluation of the expected policy paths for both the ECB and the Fed, suggesting that the market may have overestimated the potential for divergence. This reassessment supports the firm’s strategy to remain long on EUR/USD, expecting the pair to approach 1.1050 as the year progresses.
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