MUFG still expects the euro to be vulnerable in the short term, especially with rising energy prices; “We still believe that the risks remain more on the downside for the euro in the short term.”
The bank is forecasting a euro / dollar (EUR / USD) exchange rate range of 1.1550 to 1.1950 with a short-term focus on a return to August lows of 1.1664 as the hawkish tone of the Fed supports the US dollar.
EUR / USD was trading around 1.1725 on Thursday with a firm appetite for risk dampening demand for the US dollar.
Downside risks to the euro area’s growth outlook
MUFG is cautious about the eurozone’s near-term outlook, especially with soaring energy costs. According to the bank; “The downside risks to growth in Europe have also increased recently due to soaring energy prices. The supply shortage could worsen further as winter approaches, hampering economic recovery. “
The latest Eurozone PMI business confidence data illustrated these potential concerns.
The eurozone manufacturing PMI fell to a 7-month low of 58.7 in September from 61.4 the month before and below consensus forecast of 60.3.
The service sector index also weakened to 4 months 56.3 from 59.0 and below market expectations of 58.5.
The composite production PMI index fell to a 5-month low at 56.1 from 59.0.
The data indicated that demand peaked while there were still critical challenges surrounding supply chains.
There was further upward pressure on costs and prices, with selling prices rising at the third highest rate on record.
The ECB should maintain a very accommodating monetary policy.
“The ECB is still expected to lag far behind other G10 central banks and major central banks when it comes to rate hikes, which will increasingly encourage the use of the euro as a funding currency. . ”
German election on the radar
The MUFG expects an opposition SPD victory to be the most likely outcome of this weekend’s federal election, although the party will likely have to form a coalition with the Greens and another small party to get it. a majority.
The MUFG expects fiscal policy to tend to be looser, which would provide an element of support for the euro, although it is unlikely to be a game-changer for the single currency.
“More radical changes such as debt brake reform or any move to make the EU’s common borrowing power permanent seem unlikely without a required two-thirds majority in parliament. “