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The EUR/USD pair is expected to hit 1.02 level in the next few months. However, the EUR rallied through the start of the year on short-covering. Higher inflation, driven in part by rising fuel costs, prompted market expectations that the European Central Bank (ECB) may start to taper its asset purchase programme later this year, Scotiabank reported.
Core Eurozone 10-year bond yields rose to 0.5 percent through the end of January and short-term yield spreads versus the USD compressed, driving EUR/USD pair to the 1.08 area.
Core yields have eased again and short-term rates have declined significantly in the past few weeks as investors have moved out of weaker, peripheral bond markets as well are larger, core markets (France) amid rising investor worries that the results of key elections (The Netherlands, France and Germany) over the course of the next few months could further destabilize the EUR project.
Two-year Eurozone-US rate spreads have widened to more than 200 basis points, the largest yield advantage for the greenback in the EUR’s lifetime.
"We think the central bank will maintain its current policy stance through the end of the year," the report said.
