Nordea: We expect EUR/USD to drop like a stone later this year

Analysts at Nordea say they expect EUR/USD to fall to 1.16 by the end of the year, saying that the pair has already peaked.

“We recently updated our so-called dollar-o-meter and found that relative growth, relative inflation and relative central banking policy all favour the USD,” analysts Jan von Gerich and Andreas Steno Larsen said in a research note.

“We therefore stick to our view that the USD is at risk of wrong-footing the consensus once more, and strengthen rather than weaken in 2021, and accordingly decide to lower our year-end forecast for EUR/USD to 1.16.”

Vaccine rollout
One of the reasons they cite for expected USD strength is the vaccine rollout. The US is currently vaccinating at almost double the pace of the European Union, which will likely allow the US to lift more restrictions earlier.

Bond tapering
On the pace of the Fed’s bond purchases, Nordea argues that they expect the market to be questioning the pace of the QE programme around “summer at the latest” which could increase the possibility of higher USD rates into the summer, and therefore wider USD-EUR interest rate spreads.

“This is over time likely to weigh on the EUR/USD, not least as the USD will climb the carry ladder again as the Fed is one of the more “alive” central banks in G10 space,” von Gerich and Larsen said.

Other currencies
The vaccine rollout is also supporting GBP as vaccines were approved early and the UK has spaced out the timeframe between the first and second jabs, which so far appears to be working. With that in mind, Nordea targets 0.8400 for EUR/GBP by the end of this year.

On commodity linked major currencies, Nordea are cautious.

“We generally find that the reflationary vibes may fade in to the second half of the year, which leaves e.g. AUD, NZD and CAD semi-vulnerable,” they said.