Despite still extended short positioning, widening interest rate spreads should continue to exert downward pressure upon EUR in the week ahead.
This driver was again evident this week following the ECB policy meeting where initial disappointment following the ECB press conference quickly fading been replaced with renewed EUR selling. Justification for such selling was corroborated by the EMU-US 3x6FRA spread which has moved over 0.1% against EUR/USD in the past week.
Hence with market expectations keenly focused upon the possibility of sovereign QE by the ECB, such selling appears unlikely to be easily distracted as we move into year-end. Indeed the ECB sovereign-QE threat, plays in favour of policy makers buying them further time to see if current policy measures are gaining necessary traction.
As such EUR/USD should depreciate further into year-end on pure ECB-policy before the Fed profile is even considered.
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