EUR/USD heading towards 1.078 – Natixis

Research Team at Natixis, notes that the EUR/USD broke below their first target at 1.09 and is currently testing 1.086 as the pair’s correction is manly the consequence of the divergence in the monetary policies pursued in the US and in the Eurozone.

Key Quotes

“Mario Draghi’s statement last week weighed on the pair. The European Central Bank president denied rumours that an early tapering of asset purchases has been discussed and did not rule out a QE extension. Concurrently, the US dollar was buoyed by some good macroeconomic data out of the US.

This week, the performance of the EUR/USD will be influenced by the next macroeconomic indicators, in particular inflation. In this respect, after the air pocket experienced over the summer after the Brexit vote, the PMI survey improved in October. The October flash estimate will only be published next Monday, but before then Germany will publish preliminary estimates.

As yet, inflation remains weak, but it will increase because of base effects linked to the upturn in crude oil prices. In an environment characterised by an improvement in growth and stronger inflation, the European Central Bank (ECB) will be hard put to justify a QE extension until September 2017. Nonetheless, our view is that it will have no choice but to extend QE to avert major strains on long rates in Southern Europe (Italy and Portugal in particular).

Furthermore, inflation excluding energy and food remains weak at 0.8% (compared with 2.2% in the US). In short, the EUR/USD still has some downside, but the main driver will be the Federal Reserve in 2017, as and when the market starts factoring in a more rapid tightening of its monetary policy. In the short term, the EUR/USD could test 1.0780 in the run-up to the FOMC meeting on 2 November. Over the medium term, we still have a target of 1.05, significantly below the 1.10 consensus.”