Danske Research Team notes that EUR/USD has retraced its war-linked decline and now trades around 1.18. They have revised their 1M and 3M EUR/USD forecasts to 1.18, expecting the pair to stay near current levels in the short term. Over a longer horizon, they project a higher EUR/USD, driven by relative monetary policy, Oil normalization and US inflation dynamics.

Pair seen steady near 1.18

"In the euro area, the final HICP inflation data was slightly higher than the flash release with headline at 2.6% y/y compared to 2.5% y/y in the flash, mainly due to rounding. Core inflation confirmed the flash release of 2.3% y/y. "

"Hence, the data does not change the picture compared to the flash release and in isolation supports a hold in April, although the future inflation prints will be much more important for the ECB than the March one."

"Furthermore, an ECB sources story revealed that the Governing Council is leaning towards keeping interest rates unchanged in April as it is too early to give a verdict on the consequences of the Iran war. Schnabel also stated that the ECB can afford to take time to analyse the shock and that they do not want to impose unnecessary costs on the economy."

"This has decreased the likelihood of an April hike with markets pricing in 5bp worth of hikes. We have adjusted our ECB call and now expect hikes in June and July."

"Over the past month, EUR/USD has retraced its war-linked move lower, now trading around the 1.18 mark. In short, we have revised our 1M and 3M EUR/USD forecasts to 1.18 and thus look for the cross to stay around current level in the short-term."

"In the longer term, we expect a higher EUR/USD, driven by three key factors: a drop in carry as ECB hikes and Fed cuts are expected this year, normalisation in oil prices, and relatively higher US inflation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)