MS: low chance of higher euro
Analysts at Morgan Stanley point out that rate and yield differentials are working against the euro. The increase in the euro-system central bank balance sheets increase is also negative for the single currency. The ECB balance sheet is expected to rise via the bond buying program (QE).
There’s chance that the lack of bond supply will limit the increase in the central bank’s balance sheet, and the euro area bond yields will fall even more, though this won’t help the euro much.
The impact on the single currency will be positive only if the euro area’s GDP starts rapidly growing: in this case the ECB may reduce monetary stimulus. In this case, EUR yield differentials would turn supportive due to increasing capital demand in the euro zone.
Morgan Stanley will watch how things go as the QE starts in March. All in all, the bank remains bearish on the euro expecting EUR/USD to slide to 1.05 by the year-end.