Jane Foley, Senior FX Strategist at Rabobank, suggests that they expect the EUR to gain ground vs. many EM currencies in the coming months, as they continue to favour the USD vs. the EUR. 

Key Quotes

“The outcome of today’s ECB policy meeting will shine a spotlight on this view given market expectations for some communication about further tapering of QE.   We would view any support given to EUR/USD today as temporary given that any message provided by the ECB on interest rate is set to be far more dovish that that communicated last night by the Fed.”

“Last week’s comments from the ECB’s Praet may have been orchestrated to prepare the market for some news on QE at today’s meeting. That said, we would argue that with the current policy guidance set to expire after September, some communication was always likely either in June or July.”

“The fact that the value of the EUR was bolstered last week on the back of Praet’s remarks has reduced the risk of the ECB providing a hawkish shock today and thus has limited the potential for further upside the EUR.  Also, the likelihood that further tapering this year may be due to technical reasons reduces upside potential for the EUR, since this raises the risk that the ECB may aim to offset news on tapering with a dovish view on rates.”

“We continue to hold the view that the Fed may forgo a rate hike in December and limit itself to a total of three moves in 2018.  Either way, by September 2019 the ECB will be significantly behind the Fed in terms of policy normalisation.  In addition to interest rates, EUR investors should be on guard for potential conflicts between the EU and Italy on budgetary issues.”

“Italy’s budget proposals are due in October and this could be crucial in setting the tone for the EUR.”

“We maintain a 12 mth forecast for EUR/USD of 1.12.”

 

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