Morgan Stanley Global FX Strategy Week Ahead for: Euro, Dollar, Yen, Pound, Franc, Australian and New Zealand Dollars - Pound Sterling Live
The desk maintains a bearish outlook on the Euro against the Dollar, forecasting continued weakness in the near term. Per the full note from Morgan Stanley, the expectation is driven by diverging monetary policy trajectories between the European Central Bank (ECB) and the U.S. Federal Reserve, particularly as the latter remains more aggressive in its rate hikes. Observations indicate that while the ECB is navigating a landscape of tightening, its pace appears insufficient to counteract ongoing U.S. dollar strength, with inflationary pressures in the Eurozone continuing to lag behind those in the U.S. Consequently, the potential for further divergence in growth and interest rates supports a bearish Euro view against the Dollar. This outlook resonates with current market sentiment, underscored by recent economic data that show more robust employment growth in the U.S. compared to the Eurozone.
What the desk is arguing
The desk frames this as an opportunity for traders to capitalize on continued Euro weakness against the Dollar, suggesting that the cross could challenge the 1.05 level soon. This sentiment is reinforced by the anticipation of a prolonged tightening cycle from the Fed, with market participants pricing in additional rate hikes. Furthermore, recent GDP readings from the U.S. have outperformed those from the Eurozone, indicating a clearer divergence in economic trajectories between the two regions.
Supporting this bearish outlook, the recent inflation data has shown a persistent trend, with U.S. CPI rising to 4.9% year-over-year, compared to the Eurozone’s 7.0%, which adds to the narrative of the Fed retaining a hawkish stance. Market positioning is also leaning towards this bearish sentiment, as futures markets reflect an expectation of continued Fed rate increases while the ECB remains cautious due to various economic headwinds.
The alternative read would be a surprise shift in ECB policy if inflation metrics unexpectedly increase, prompting aggressive actions to narrow the interest rate gap with the Fed.
Where it sits in our coverage
Our consensus target for the EUR/USD is set at 1.075, with a range spanning from 1.04 to 1.12. Notably, jpmorgan has a target of 1.10 for March 2026, signaling alignment with the desk’s bearish view. In contrast, bofa sets a lower target of 1.04 for the same horizon, indicating a divergence in expectations about Euro performance.
This view places the desk's forecast towards the middle of market expectations, reflecting a moderate stance that aligns closely with jpmorgan, while being more optimistic than bofa's more bearish outlook.
How other firms see it
Several firms, including jpmorgan and citi, appear aligned with this bearish sentiment on the Euro, forecasting further declines against the Dollar. Conversely, bofa and ubs offer a more cautious perspective, with estimates reflecting potential stabilizing action in the Euro, suggesting different interpretations of the macroeconomic landscape.
As we monitor the unfolding economic dynamics, keep an eye on related pairs like USD/JPY and EUR/GBP, which may experience spillover effects based on the Dollar's strength versus the Euro and broader G10 moves.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The desk anticipates continued Euro weakness against the Dollar amid diverging monetary policies.
- 02U.S. economic data, particularly stronger inflation and employment metrics, support a hawkish Fed compared to the ECB.
- 03Market positioning reflects a bearish sentiment towards the Euro, reinforcing the desk's outlook.
Market implications
Traders should monitor the EUR/USD closely, particularly watching for levels around 1.05 as a potential breaking point for further declines. Additionally, any upcoming data releases related to U.S. inflation may serve as catalysts for accelerated moves in this pair.
Risks to this view
A significant invalidating factor for this bearish thesis would be a shift in ECB policy prompted by unexpectedly high inflation data, which could lead to increased rate hikes and support for the Euro. Moreover, geopolitical developments or unexpected economic stimuli in the Eurozone could challenge the Dollar's bullish momentum.
Sources & References
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