Given that further ECB rate hikes are already priced in, reasons to buy the EUR may be running dry. In our view, EUR/USD may be in the process of peaking. We see scope for a move lower in the months ahead potentially towards the EUR/USD1.06 area.
One well publicised area of potential concern for Europe’s financial system is commercial property. Reuters recently reported that European commercial real estate investment fell to its lowest level in 11 years in Q1 2023. Fears of economic downturn coupled with declines in office occupancy following the pandemic have triggered the concerns for this sector. As in the US, technology suggests that deposits could flow fast in Europe away from certain banks which could in theory expose a financial institution to realising losses on assets.
Any broadening in financial sectors stress is likely to result in the safe-haven bid for the greenback. Either way, in view of widespread fears of a US recession and Eurozone stagnation in H2, in addition to evidence that the post-pandemic recovery in China is disappointingly patchy, we expect the USD find support due to risk aversion. We see risk of dips as low as EUR/USD1.06 in H2. - Rabobank
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