EUR/USD to break below 1.18 towards 1.17 amid correlation breakdown – Nomura
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The European Central Bank (ECB) opted for a static 2% inflation target over the medium term in its strategy review. EUR/USD is lower since June thanks to higher front-end rates pricing for the Fed. But since then, EUR/USD hasn’t appreciated on the turn lower in US rates we've had this week, which is confusing. Economists at Nomura are of the view the US rates move has further to go and EUR/USD should climb higher with it.
Could the new strategy move EUR?
“From a market perspective the most important news is that the ECB has switched from an inflation target of ‘close to, but below, 2%’ to 2% identically, specified over the medium-term and symmetric in nature (i.e. that overshoots are seen as equally undesirable as undershoots).”
“We see it as a modestly dovish move at the margin, supporting our view that the ECB will need to expand its APP next year as and when the PEPP is wound down (what the ECB describes as a ‘forceful’” response to avoid sub-target inflation expectations becoming entrenched).”
“In view of the conflict from macro signals for EUR and USD, we remain short EUR/GBP in relative value terms, with real rates grinding lower pointing to a move towards 0.83.”
“We are waiting for EUR/USD to break below 1.18 towards 1.17 before considering fading price action and for macro correlations to kick back in. Currently, the risk off in markets looks to be position reduction, with the catalysts for it unclear.”
“We’re of the view the US rates move has further to go and EUR/USD should climb higher with it — but we need to see if this position squeeze has finally played out first as markets are in a correlation breakdown.”
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