Analysts at MUFG Bank, see that more easing from the European Central Bank is well priced, they see a larger cut. Regarding the EUR/USD pair, they see it trading in the 1.0500-1.1300 range over the third quarter and between 1.0600-1.1400 during the fourth.
Key Quotes:
“The euro drifted further lower in August as the financial markets increasingly positioned for aggressive monetary easing by the ECB at its upcoming monetary policy meeting on 12th September. President Draghi already signalled easing at the last meeting in July but additional comments from ECB Council Member, Olli Rehn have reinforced expectations of aggressive action. In August he stated that the ECB should announce an “impactful and significant” stimulus package in order to overshoot market expectations. The OIS curve over the coming 12mths has shifted lower, by about 6-7bps indicating increased speculation on a larger rate cut at the meeting. We expect a larger than consensus cut of 20bps in the deposit rate to - 0.60%; the introduction of a tiering system on the deposit facility and confirmation of QE being re-activated, in Q4 possibly in October.”
“One downside risk that is likely to recede going forward relates to fiscal uncertainty in Italy fuelling BTP volatility and EUR selling. The potential coalition between Five Star and the Democratic Party is likely to be more fiscally responsible and helped drive 10-year BTP yields below 1.00% for the first time ever. However, of course we are assuming a no-deal Brexit and hence political risks will still drive EUR lower.
“We have maintained our forecast levels from last month and are based on the assumption of aggressive ECB easing in September and a no-deal Brexit dragging EUR/USD lower into year-end. Some modest recovery in H1 2020 is probable from extreme under-valued levels if euro-zone growth recovers modestly by then.”
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