We first revised our forecasts to show EUR/$ downside in April 2014, on the rationale that economic outperformance would see the Fed raise rates ahead of the ECB, moving rate differentials against the single currency. At this juncture, our 12-, 24- and 36-month forecasts for EUR/$ stand at 1.00, 0.95 and 0.90, respectively, and rate differentials are still the main driver for our view.
Periodically, however, other factors have emerged to drive EUR/$, notably in mid-2012 when break-up risk was acute and ECB President Draghi made his now famous “whatever it takes” speech, essentially pre-announcing the OMT program. This narrowed Euro periphery risk premia (Exhibit 1), driving EUR/$ far above what was justified by rate differentials (Exhibit 2).
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