(Bloomberg) -- The euro is set to take its cue from the Federal Reserve rather the European Central Bank over the next few months.
The common currency advanced to the strongest level since March as the extra yield investors get from holding 10-year U.S. Treasuries rather than German bunds narrowed. JPMorgan Chase & Co. has exited a tactical position betting on a slide in the euro, while Nordea Bank Abp is forecasting an almost 3% gain by the year-end.
Europe’s shared currency is on course to snap a five-month decline in June even after ECB President Mario Draghi signaled additional monetary stimulus at Sintra last week. Analysts say that growing conviction the Fed will cut interest rates as soon as next month has captured the market’s attention and driven the dollar lower against the euro.
“We exit our short position and turn tactically neutral,” said Paul Meggyesi, the head of currency research at JPMorgan, in a client note. This is “predominately because of the potential for accelerated Fed cuts that could deliver materially narrower rate differentials over a shorter time frame than we had envisaged irrespective of the ECB’s new-found eagerness to ease.”
The euro gained 0.2% to $1.1387, its strongest level since March 22, after climbing 1.4% last week. The difference between the yield on 10-year U.S. Treasuries and bunds was 234 basis points, compared with 244 basis points at the end of last year.
The currency tested resistance at the 233-day moving average of $1.1380, sending a bullish signal to investors who place trades based on technical strength. JPMorgan sees the euro ending the year at $1.15, while Nordea is even more bullish.
“We stay long EUR/USD in our convictions ahead of Fed’s first cut in July,” said Andreas Steno Larsen, a currency analyst at Nordea, which has a short-term target of $1.1650 and a year-end prediction of $1.17. “A stabilization of euro-area data is a prerequisite for this view.”
To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee
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