EUR/USD: Support conditional on fiscal stimulus – CIBC

Analysts at CIBC,  see the EUR/USD pair trading at 1.10 during the fourth quarter and at 1.14 during the second quarter of next year. 

Key Quotes: 

“The ECB launched its last monetary policy bazooka under the Draghi regime. The problem is that it was more of the same”

“The open-ended nature of asset purchases caught the market off guard. The expectation going into the meeting was for EUR30bln over 12 months for a total size of EUR 360bln. A similar sized program under the released statement implies that the program will extend into mid2021 so the initial sticker shock was overdone by the market. Additionally, the tiering program was far more generous than expected and that should lead to a scarcity of excess reserves in the Italian and Spanish banking systems. That will likely lead to some volatility in the overnight market for banks in those countries.”

“But monetary policy is tapped out in the Eurozone. As we’ve argued before, the lack of demand for credit in the Eurozone will not be cured by these measures. Instead, the focus is on fiscal policy in the Union and whether they will expand it going forward.”

“Judging by EUR/USD price action, the market is betting that they will long before 2021. We agree, which is why we’re retaining an upward bias to our EUR/USD forecast profile.”