EUR/USD has been range-bound over the last few months but we continue to believe the range is likely to break to the downside.
The drivers behind euro weakness remain familiar themes: risks of additional large-scale easing from the ECB and huge portfolio outflows driven by reserve manager losses as well as European portfolio re-allocation abroad.
Two additional bearish EUR/USD factors have emerged since the start of the year: weakening growth momentum driven by rising external headwinds and European financials volatility; as well as rising geopolitical risk on the back of the refugee crisis and the Brexit debate.
We continue to forecast a move down to 1.05 by the end of Q1 followed by a move down to parity and beyond over the rest of the year. The most significant risk to our aggressive bearish view is an ECB or Fed disappointment. The former driven by unwillingness to deliver more easing (or its ineffectiveness), the latter driven by unexpected additional weakness in the US economy that prevents any Fed tightening this year.
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