Strategy from Deutsche Bank
Recent developments in EUR/USD point to a renewed deterioration in fundamentals across our two most important guiding frameworks - flows and real rates.
On the flow side , the basic balance - the sum of the current account, FDI and portfolio flows - remained negative but stable throughout last year as large portfolio outflows offset the current account. Flows have recently taken a turn for the worse however, this time driven by foreign direct investment (FDI) outflows. European appetite for foreign companies is picking up, and a similar message is given by our more forward-looking cross-border M&A monitor. The basic balance is now at its weakest post-crisis levels pointing to a EUR/USD break below 1.05 based on previous relationships.
On the real rates side, the recent Fed repricing has helped push near-term "fair value" back down below 1.10 , and it is our belief in the continuation of a Fed hiking cycle - however shallow - that is crucial for this rate spread to continue to widen.
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