Analysts at MUFG Bank, point out that the rate guidance provided by the European Central Bank (ECB) should keep USD weakness limited in the near term, at the same time they say the positive macro backdrop should limit the downside in EUR.
Key Quotes:
“Given tapering is coming from the Fed at some point in Q4, we see it as highly likely that the ECB commits to keeping the pace of PEPP purchases “significantly higher” than earlier in the year. That will ensure quite a notable divergence in Fed/ECB policy into year-end.”
“While we believe there may be an element of ‘buy the rumour, sell the fact’ response to a Fed taper plan (assuming it is a cautious plan covering say 8-10mths) that results in some modest USD weakness through to year-end, the divergence in policy between the Fed and the ECB is set to persist.”
“The short-term rate differentials remain a more important driver for EUR/USD and hence how QE changes influence rate expectations will be important. The ECB’s rates guidance suggests any near-term USD weakness will be limited.”
