The EUR has remained under pressure of late. This is due to ECB President Draghi’s reassurance that QE will continue beyond September 2016 if needed and that it will at least last until inflation is on a sustained path towards 2%. Still capped commodity price developments and muted domestic conditions should keep price developments muted.
It appears unlikely that investors’ central bank easing expectations will stabilise anytime soon, even if growth prospects were to brighten further.
This suggests that the EUR will remain capped for longer. However, in order to push EUR/USD considerably lower from current levels Fed rate expectations may need to rise further. As there seems to be scope for the Fed to consider higher rates as soon as mid-year, we anticipate further diverging monetary policy expectations to the detriment of the pair.
We remain short EUR/USD targeting a move towards 1.06.
In terms of data next week’s main focus will be on final February CPI readings, which will confirm still muted price developments.
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