The persistently weak inflation data within Europe will increase market expectations that the ECB will have to do even more going forward, keeping the EUR under pressure, says Morgan Stanley.
"Indeed, we expect ECB easing measures to have a more direct negative impact on the EUR than seen previously. The ECB highlighting its desire to expand the balance sheet and pointing out the relative monetary policy divergence among the G10 suggests that the EUR is an important monetary policy transmission channel," MS projects.
"With foreign investors already showing signs of a more cautious approach towards European assets,... we expect the EUR's vulnerabilities to be increasingly exposed," MS adds.
Going forward, MS thinks that EUR rebounds are likely to remain limited in the near-term, continuing to provide selling opportunities, not just against the USD, but also on many of the crosses.
In line with this view, MS now runs a new limit order to sell EUR/USD as a short term at 1.27. MS also holds another short EUR/USD position from 1.2920 in its strategic portfolio.
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