We revise our near-term forecasts for EUR to the upside to account for the latest China-induced risk selloff. We expect the positive correlation between risk aversion and EUR to keep the single currency supported in the near term.
The resilience should be evident against USD given that the Crédit Agricole CIB economists have pushed their Fed lift-off call from September to October 2015. Going into year-end and into 2016 we expect the policy divergence trade to reinstate itself, however.
Strong EUR coupled with slowing global growth and lower commodity prices should increase the risk that the ECB QE will continue beyond September 2016, making the EUR an even more attractive funding currency.
All that should bring EUR NEER back down to its recent lows over the forecast horizon. We lower our medium-term outlook for EUR/USD in view of the persistent policy divergence between the dovish ECB and hawkish Fed.
Credit Agricole now targets EUR/USD at 1.12 by the end of Q3, 1.06 by the end of the year, and 1.04 by the end of Q1 of 2016.
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