Fed Cheat Sheet: EUR/USD to test 1.2275 in the base case scenario – TDS

Investors eye changes in the Federal Reserve's bond-buying scheme in its last decision of the year. Here are three scenarios as described by economists at TD Securities. The base case sees further downside risks for USD. This could send EUR/USD higher with a possible test of 1.2275 in view.

See – Federal Reserve Preview: Forecast from 11 major banks

Key quotes

“Hawkish (20%): No change to QE program, including forward guidance. Highlighting of strength in recovery to date and vaccines related optimism. Highlighting of strength of recovery to date and upside risks to 2021 from vaccines. In turn, no need now for making QE more accommodative. This could see a correction in EUR/USD back toward recent range lows around 1.2050. Beyond that, a more hawkish tint could see a pullback to test major support at 1.2010.” 

Base Case (Dovish) (45%): New QE forward guidance and WAM extension. Tone on the economy balances positive implications of vaccines for medium/long term with near-term challenges as COVID cases surge. Balancing of ‘light at end of tunnel’ from vaccines with near-term ‘uncertainties.’ Highlighting of low inflation and likely need for policy to remain accommodative well after the economy gets a boost from vaccines. We could see EUR/USD squeeze up toward 1.2275. Other G10 pairs that aren’t encumbered by strong drivers of their own right now (GBP for example) could see similar moves.”

“Less Dovish (35%): New QE forward guidance, but no WAM extension. Highlighting of near-term downside risks, but not enough of a case yet for WAM extension. Emphasis on too-low inflation and threat to recovery from the latest COVID-19 wave. Highlighting of potential for WAM extension at a future date. EUR/USD at 1.2110.”