EUR/USD has gone sideways for quite some time. What’s next for the currency pair?

Here is their view, courtesy of eFXnews:

We expect the EUR to remain under selling pressure, with risks related to politics only explaining part of EUR weakness. It seems that within a globally inflating environment the divergence in core EMU growth and inflation will be more evident. A one-size-fits-all monetary policy and the absence of fiscal flexibility suggest monetary and financial conditions within the EMU should diverge, pushing nominal GDP growth differentials further apart. EUR real yield and rates are likely to stay low for longer, pushing the EUR lower.

We have made little change to our EURUSD forecast, still seeing 0.97 by year end, with the skew heavily on the bear case (0.87) relative to the bull case (1.02).

EURJPY is the cross to watch, with downside expected. In our view, Japanese investors have bought into the EMU deflation scenario for too long and are now running excessive positions within EMU’s semi-core bond markets. For instance, Japan holds 12% of all outstanding French sovereign bonds. It is not only the political risks that concern these investors. EMU seems to be also developing increasing inflation pressures within its core economies, while peripheral countries continue to deal with disinflationary dynamics coming on the back of a lack of structural reform and tightening monetary conditions, seeing local funding costs rising at a faster pace than local inflation rates.

In its strategic portfolio, MS maintains a short EUR/USD position from 1.0650, targeting 0.99, with a stop at 1.0850.*