For EUR/USD, the market is currently moving between a bottleneck-scenario (towards 1.18) and a dollar debasement case (remains above 1.20). Over the second half of the year, Danske Bank’s main scenario remains ‘peak reflation’ – which means the pair plunging towards 1.15.
“Last week, Tuesday the 4th, on Monday 10 and on Tuesday 11 we are seeing a scenario of ‘bottlenecks’, where all kinds of commodity producers are doing quite well but headline indices are trading on a weak footing, centred in the online/tech-economy exposures. In this scenario, the effect from weak equities and rising volatility exceeds the positive effect from terms of trade. Hence, we have seen NOK, SEK and EUR trade a bit weaker. In some way, this scenario is the odd-one-out as inflation-induced volatility is the 70’s regime.”
“The short-term theme is quite uncertain (fat tails) though likely still reflationary. We suspect that moving out of cloud-like sectors into commodities will stay a broad dollar negative. On this, we see EUR/USD to stay above 1.20 in the short-term.”
“Looking further ahead, we continue to expect a scenario of ‘peak reflation’ in H2 as manufacturing PMIs cools as a shift from goods to services, Chinese monetary tightening and the catch-up effect of normalizing production levels joins in. Further, we expect the Fed to turn hawkish. Thus, rising real dollar rates are in our view a key theme for H2.”
