EUR/USD: Broadly At Equilibrium But Too Early; What’s Next? – BofAML

EUR/USD advanced from the lows after markets calmed down. What’s next? The world’s most popular currency pair may still be vulnerable.

Here is their view, courtesy of eFXnews:

Bank of America Merrill Lynch Research discusses EUR/USD outlook maintains its contrarian view for a sharp reversal in EUR/USD ahead (see here). In this regard. BofAML notes that its analysis suggests that following the EUR/USD appreciation since a year ago, EUR/USD is now broadly at equilibrium, but this may actually be too early.

Equilibrium is the level at which the exchange rate should in theory converge when both economies are at full employment, have normalized their monetary policies and have reached external equilibrium in their balance of payments. In this case, the US recovery is more advanced than the recovery of the Eurozone, suggesting that EURUSD should be below its long-term equilibrium in the short term. In any case, equilibrium arguments cannot support further EUR appreciation, in our view.

Finally, we estimate a Behavioral Equilibrium Exchange Rate (BEER) model, which also suggests that EURUSD is broadly at its long-term equilibrium. Our estimates suggest that the EURUSD equilibrium is 1.22. This suggests that EURUSD is actually slightly overvalued following the further USD sell-off so far this year,” BofAML adds.

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