Synopsis:

Morgan Stanley initiates a long EUR/USD trade with a target of 1.20, citing a durable shift in global macro narratives and a breakdown in traditional USD risk behavior. The bank expects USD-negative capital flows to accelerate unless confidence-boosting action is taken by US policymakers.

Key Points:

• New Global Narrative:
  The outlook has shifted away from US exceptionalism. With global investors rotating away from USD, the case for structural EUR strength is building.

• Trade Recommendation:
  Morgan Stanley has entered a long EUR/USD trade, aiming for 1.20 as the next leg higher.

• Flow Dynamics:
  Investor reallocation toward EUR and JPY is gaining momentum, driven by Fed pricing and fading confidence in the US growth/inflation mix.

• USD's Risk Behavior Shift:
  The USD has decoupled from traditional safe-haven behavior, weakening even during risk-off episodes—suggesting further vulnerability if this pattern persists.

Conclusion:

Morgan Stanley believes EUR/USD upside has more room to run, with broader capital flows and macro realignment supporting the euro. Without a US policy pivot to restore confidence, the dollar's decline could deepen, pushing EUR/USD toward 1.20 in the coming months.