EUR/USD not traditionally comfortable below 1.08Stands to recoverBut allow near-term weaknessAs safe haven USD bulldozes ahead

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Foreign exchange strategists at DNB Markets say the Euro's foray below the 1.08 USD marker won't last long and they expect a steady recovery into year end.

The Scandinavian based lender and investment bank says the Euro is traditionally and structurally not prone to the current low levels we are currently seeing and that the European Central Bank can soon offer some support via the yields channel.

The Euro to Dollar exchange rate (EUR/USD) dipped below 1.08 last Friday and has extended lower to 1.0686, where we find it at the time of writing. (Set your FX rate alert here).

No doubt, DNB Markets acknowledge near-term pressures and are not yet inclined to call an imminent rebound.

DNB's Analyst Ingvild Borgen says higher expected interest rates in the U.S. compared to other major economies, in combination with its status as a safe haven in times of market unrest, is the reason behind the U.S. dollar’s strength against other G10 currencies recently.

"This is also visible in the EURUSD, which has once again fallen to below 1.08," says Borgen, "despite the relief from Emmanuel Macron’s solid win in the French Presidential election on Sunday."

To be sure, DNB Markets identify some investor nervousness embedded in Euro-Dollar: they believe some of the drop in the EUR/USD, from 1.11 in mid-March to the 1.08 handle in mid-April, was due to a small ‘Le Pen risk premium’ being priced into the EUR, as Macron’s lead over Le Pen in opinion polls tightened somewhat in this time period.

But, "the fact that the EURUSD has not recovered any of this but instead fallen further following Macron’s victory is in our view a token of how sensitive the EURUSD currently is to fluctuations in risk appetite," says Borgen.

A drop in global stock markets linked to growth concerns in China as Covid lockdowns are introduced appears to be a key concern for investors at present.

These concerns have come alongside a rally in the Dollar to fresh two-year highs.

But DNB Markets maintains a view that the EUR/USD will trade significantly lower than 1.08 for a sustained period.

"The main reason for this is that EURUSD has never, since 2002, traded at such low levels barring short periods in which monetary policy in the US and the Eurozone moved in completely opposite directions," says Borgen.

Furthermore, "while the Fed is set to tighten policy more and faster than the ECB, we think the ECB is set to start hiking interest rates and end QE later this year, and that this will change investor’s sentiment towards the EUR."

She says this will lead to a stronger Euro against the U.S. Dollar in the longer term.

In 12 months’ time, DNB Markets forecast EUR/USD to trade at 1.10.