The euro is expected to move in a range against the dollar in the near term and to weaken in the medium term, Danske Bank Research said.
“While our forecast for the Federal Reserve and the European Central Bank suggests upside risk to the cross in 1Q, we stress that a broader central bank pricing could prove to be more crucial for EUR/USD,” Danske said, adding that it saw levels above 1.10 as temporary.
It has maintained a strategic case for a lower EUR/USD in the medium term.
Sterling weakened after U.K. data showed wages continuing to slow from elevated levels , with average pay growth excluding bonuses falling to 6.6% in the three months to November from a revised 7.2% in the period to October.
This should reassure the Bank of England that risks of more persistent inflation in the U.K. are easing, MUFG said.
“It will encourage the U.K. rate market to price in earlier and deeper BOE rate cuts in the year ahead, weighing on the pound.”
Danske Bank Research said sterling hasn’t moved a great deal against the euro over the past month, but a relatively weaker performance of the U.K. economy than that of the eurozone will eventually weigh on the pound.
Danske expects EUR/GBP to rise to 0.89 in six to 12 months, compared with 0.8620 currently. For now, however, the global investment environment suggests there’s little “meaningful difference” between sterling and the euro, it said.