Euro’s longer-term prospects are quite bright - TDS

Analysts at TDS offer their view on the Euro, in its latest G1 FX outlook report for H2 2018.

Key Quotes:

“The EUR rallied in 2017 amid solid growth and inflation metrics slowly returning to target. Against this backdrop, the EUR has been at the forefront of the convergence trade. With a gain of 14.1% vs USD in 2017, the EUR was the best-performing G10 currency. 

However, we turned tactically bearish EUR in early Q2 as a correction appeared due. We retained our strategically bullish EUR outlook, however. We have held this stance since early/mid-2017 as the currency's fundamentals have steadily improved. 

We are reverting to a more neutral/bullish footing. We think the EUR's latest correction will reverse as the macro dynamics supporting its appreciation are both powerful and durable. 

Weak "underlying" inflation remains a persistent concern for the ECB despite an extended period of above-trend growth. Some alternative measures to core HICP suggest a more sustained increase in price pressures but progress has been slow.

This could leaves the ECB on a somewhat cautious footing, tempering our near-term bullish outlook. 

Still, we think the EUR's longer-term prospects are quite bright. The EUR enjoys solid support from its external balance position. Capital flows are turning more constructive as global investors return to European financial markets. The EUR is a natural beneficiary of ongoing political turmoil in the US.“