Economists at Danske Bank discuss the possibility of a short-term rise in EUR/USD due to USD weakness resulting from softer US data.

EUR/USD to trend lower over the year

If our expectation of a softer US labour market holds true, we could see EUR/USD rise further in the very near term. However, over the year, we still expect EUR/USD to trend lower. 

We believe the US economy is in a stronger position relative to the Euro Area, based on factors such as relative terms of trade, real rates, and relative unit labour costs. There are also signs that underlying inflation appears more persistent in the US compared with the euro area, which, all else being equal, should support the USD.

A strong USD, coupled with tighter financial conditions, is a necessary condition for the Fed to sustainably achieve its inflation target of 2%. 

We forecast EUR/USD to reach 1.0500/1.0400 within a 6/12M horizon.