EUR/USD: Base case scenario is for 1.2000 by Q2 2021 – Morgan Stanley

Analysts at Morgan Stanley recommend going long on the euro against a basket of currencies, especially the USD, CHF, GBP and SEK. The bank, however, warns of the downside risks to the EUR rally.

Key quotes

“The recent EU debt proposal means that some of the risk premium for EU break-up risk which has been embedded in European assets since the eurozone debt crisis will abate. 

The creation of a new large and liquid (likely), higher-yielding AAA asset will attract inflows from real money investors and reserve managers alike and support EUR higher.

We expect the EUR rally to come in stages - initially positioning and sentiment adjustment (no longer bearish) followed by active allocation to eurozone assets via equities as growth picks up.

The key risks for the view are:

Trade tension escalation creates safe-haven demand for USD.

Eurozone recovery disappoints.

The base case is to 1.20 by Q2 2021.

'Bear' case is for 1.1140 while the 'bull' case is for 1.2600. “