Danske Bank economists maintain their strategic case for a lower EUR/USD , predicting the pair to reach 1.02 in the next six-to-twelve months. They argue that this will be driven by tighter financial conditions, relative rates, and asset demand, along with new energy and real rate shocks. In this article, we will explore Danske Bank's reasoning for this forecast and the potential implications for traders and investors.

Introduction
The EUR/USD has been trending downwards, with the pair currently trading at around 1.19. Danske Bank economists have long predicted a strategic case for a lower EUR/USD , citing factors such as relative terms of trade, real rates, and relative unit labour costs. However, they now also see the potential for a short-term dip in the currency pair due to tightening financial conditions, relative rates, and asset demand.

Factors Driving the EUR/USD Forecast
Danske Bank's forecast for a lower EUR/USD is based on a combination of long-term and short-term factors. These include:

Relative Terms of Trade
Danske Bank economists argue that the Eurozone's terms of trade have been deteriorating relative to the US. This is due to the EU's high dependence on exports and a less competitive manufacturing sector compared to the US. As a result, the bank expects the EUR/USD to trend lower over the long term.

Real Rates and Growth Prospects
Danske Bank also believes that real rates and growth prospects are more favorable in the US than in the Eurozone. The bank notes that the US has outperformed the Eurozone in terms of GDP growth, and that US real rates are higher. This gives the US a relative advantage, which is likely to drive down the value of the EUR/USD .

Relative Unit Labour Costs
Finally, Danske Bank argues that relative unit labour costs are also more favorable in the US than in the Eurozone. This is due to factors such as wage growth and productivity. As a result, the bank expects the EUR/USD to trend lower over the long term.

Tightening Financial Conditions
In addition to these long-term factors, Danske Bank also cites tightening financial conditions as a potential driver of a short-term dip in the EUR/USD . The bank notes that financial conditions have already tightened recently, but expects more tightening to come. This could be driven by factors such as relative rates and asset demand.

New Energy/Real Rate Shocks
Finally, Danske Bank notes that a return to the September lows would require new energy and real rate shocks. While these are difficult to predict, they could have a significant impact on the EUR/USD .

Implications for Traders and Investors
For traders and investors, Danske Bank's forecast for a lower EUR/USD has important implications. Firstly, it suggests that long positions in the EUR/USD may be less favorable than short positions. Secondly, it suggests that traders and investors should be cautious about entering long positions in Eurozone stocks and bonds.

Conclusion
Danske Bank's economists maintain their strategic case for a lower EUR/USD , predicting the pair to reach 1.02 in the next six-to-twelve months. This forecast is based on a combination of long-term factors such as relative terms of trade, real rates, and relative unit labour costs, along with short-term factors such as tightening financial conditions and potential new energy and real rate shocks. For traders and investors, this forecast suggests that short positions in the EUR/USD may be more favorable than long positions, and that caution should be exercised when investing in Eurozone stocks and bonds.

EURUSD chart short

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