Looking ahead, we believe it is unlikely that the ECB will exceed elevated easing expectations next week. It appears that markets priced in both an extension of QE and reduction of the deposit rate by more than 10bp.
As a bigger than expected cut would most likely increase expectations of the ECB having reached the lower bound in rates, a sell the fact reaction may trigger position squaring-related EUR upside later next week. This is especially true when considering that speculative positioning as indicated by IMM data remains close to elevated territory.
All of the above stands in contrast to the USD. By now it is widespread consensus that the Fed will tighten monetary policy next month, in particular as risk sentiment and inflation expectations as measured by 5y forward breakeven rates have been well supported, irrespective of rising Fed rate expectations. Nevertheless, it must be noted too that the Fed is unlikely welcoming a further appreciating USD from the current levels. Unless growth momentum accelerates from the current levels an even stronger currency may start to dampen price developments more considerably.
All of the above suggests that the USD is facing rising downside correction risk in the weeks to come. As such we advise against selling pair such as EUR/USD around the current levels. If anything we believe that better levels closer to 1.08-1.10 can be reached before new shorts should be considered.
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