Currencies

Euro will see 'really significant' inflows as crucial tail risks have been removed, strategist says

Key Points
  • The ECB increased its Pandemic Emergency Purchase Program by 600 billion euros ($686 billion) to 1.35 trillion euros in June.
  • The EU announced a 750 billion euro recovery fund in May as it looks to shore up the bloc's economy from the fallout of the health crisis.
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Pillars supporting dollar strength have collapsed, strategist says

The European Central Bank's robust monetary policy response to the coronavirus pandemic and the prospect of a fiscal union have taken out historic tail risks for the euro currency, according to Sam Zief, global head of foreign exchange strategy at JPMorgan Private Bank.

JPMorgan has recently upgraded its price target for the common currency to $1.15 for 2020 year-end, and projects a move toward $1.20 in 2021. The euro was trading at about $1.14 on Thursday morning.

Zief attributed the euro momentum largely to the ECB's response and progress toward a potential fiscal union for EU member states, in light of the European Recovery Fund proposal set to be discussed at the EU Council summit this weekend.

"Global investment managers, global central bank asset managers have always had to assign some risk premium to the euro, given the potential for some breakup risk some time in the future, and we think that these forceful responses that we're seeing really take that out," Zief told CNBC's "Squawk Box Europe" on Thursday.

The ECB increased its Pandemic Emergency Purchase Program by 600 billion euros ($686 billion) to 1.35 trillion euros in June. Meanwhile the EU announced a 750 billion euro recovery fund in May as it looks to shore up the bloc's economy from the fallout of the health crisis.

Zief suggested that as global investors, who have been "overweight" toward U.S. assets and the dollar at the expense of the euro, begin to rebalance to "neutral," the market is likely to see some "really significant flows to the euro."

"We're already starting to see that but there are definitely legs behind it, and that's what is going to take us higher from here," he projected.

Zief added that the pillars supporting the case for a strong dollar had been knocked down, with U.S. rates coming down and the greenback largely considered overvalued by most metrics. Traditionally traders tend to prefer currencies from countries with high interest rates, as domestic assets offer up higher returns.

"There was really only one thing that was propping it up, and that was the U.S. growth outperformance relative to the rest of the world," he said.

"Cyclical risks seem to be improving, U.S. rates have now completely collapsed essentially to zero with the rest of the world, and the Fed is no longer contracting its balance sheet, it's expanding it, along with everyone else, and so all of this along with global growth starting to pick up, tends to be an environment that sees the dollar sell off," Zief explained.