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EUR/USD: Any recovery will be difficult to sustain – MUFG

Thursday saw the largest trading range for EUR/USD since the US CPI data on February 13. MUFG Bank economists analyze the outlook for the pair.

Could the Dollar weaken due to increased risk appetite?

Although German manufacturing remains in the doldrums, there are some positive points, such as the rebound in the services sector, greater than expected, which predicts a certain rebound in GDP growth in the first quarter, compared to the flat growth of the fourth. In our opinion, this portends a more favorable economic background for the Euro in the future. This makes sense from the perspective that a reversal of a much more damaging energy price crisis in Europe should have a more noticeable impact on the data as it reverses.

The 2-year US Treasury yield has risen 50 basis points this month, slightly more than the move in Germany, and with the stock market rally sparked by AI-related technology, it is more questionable that The Dollar may weaken due to increased risk appetite.

The latest forecasts point to a CPI of 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026. A cut to the 2024 level with the 2025-2026 levels averaging 2.0%, it is difficult to see why the ECB should not cut at the April meeting. As long as that small risk exists (8 basis points still in price), it will be difficult for the euro to maintain any recovery.

Source: Fx Street

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