Societé Generale - Bizarrely, EUR/USD still on target for 1.20 in 2018. But short-term...

Societé Generale - "People frequently ask for longer-term views on EUR/USD and I feel guilty for not having written thrilling tomes to provide regular updates on this fascinating subject. Over the last 5 years, EUR/USD has traded in a 1.2-1.5 range, averaging 1.35. The link above is to a summary of my thoughts, the very short version of which is:

1) EUR/USD will remain in the current range, with a slight upward bias, until the front end of the US rates market actually prices in rate hikes. All the ECB can do in the meantime is defend that range and keep EUR/USD below 1.40. A break of 1.30 requires the market to start to price in Fed action. That requires the recent weaker US data to be reversed in the spring (likely), the unemployment rate to go on falling (likely) and wage growth to start showing signs of pricing up (also likely in due course). So I still think we are in this range until we move to a lower one, even if that is going to take a long time to happen.
2) In the long run, if the recent weakness of the US economy is indeed mostly down to the weather, I still expect the Fed to begin the process of raising rates towards 4% or so in the middle of next year. By contrast, the ECB will be fighting disinflation, rising public sector debt, excess savings and a shortage of credit demand for as far as the eye can see. In other words, I can easily envisage a return to rate differentials that argue for a weaker Euro – I just can’t imagine them coming along in 2014.
3) I don’t make long-term EUR/.USD forecasts but I expect a move to 1.20 on a 3-5 year horizon and if European policy-makers can’t come up with a strategy to boost nominal growth enough to reverse the rise in debt/GDP ratios, we will at some point see the Euro a lot weaker than that."

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