EUR/USD continues sliding from the highs. Can this continue even lower? What are the drivers behind the move?
The team at Deutsche Bank examines the “divergence lite” trade:
Here is their view, courtesy of eFXnews:
“It would need both ECB and Fed to be driving divergence to generate a repeat of the unusually speedy EUR/USD decline we saw in July 2014 through early March 2015. This is not going to happen, in part because ECB rates are low, and neither ECB rates or QE balance sheet policy will be materially shifted for the remainder of this year at a minimum.
…The heart and soul of the divergence trade for the remainder of 2015 and quite likely the next few years is without question what the Fed does. This could be dubbed as ‘divergence lite‘ since i) it will predominantly come from one side, Fed tightening; and ii) Fed tightening is likely to come slowly, in keeping with restrained US growth and constrained international price pressures.
…Presumably as the market slowly prices in tightening occurring within 3 to 6 months, asset market sensitivity should increase. Regressions show that for every month we are closer to tightening, EUR/USD has gone down nearly 1%. We would expect that the FX adjustment would likely be larger as the market finally gains confidence that a tightening within 3 months is very likely.”
Alan Ruskin – Deutsche Bank
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