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For EUR/USD,  December is a critical month, especially now after Draghi raised the bar of expectations.

The team at Nomura analyzes the central banks and what it means for EUR/USD:

Here is their view, courtesy of eFXnews:

In a note to clients, Nomura discusses its outlook and forecasts for EUR/USD in light of last week’s ECB forceful hint that further stimulus is likely coming at the December meeting.

ECB: What will happen in December?

“While easing now seems highly likely in December, the nature of the easing remains uncertain.  We are inclined to think that expansion of QE is more likely than lowering of the deposit rate.  Against this backdrop, it is tempting to argue that the probability of rate cuts is now over-priced but this basic observation may be too narrow in focus. The bottom line is that the ECB has put further rate cuts back on the table, and this is the case, regardless of whether the option is actually used in December,” Nomura argues.

Does it matter for the Fed?

“Thursday’s ECB decision should not have a major influence on the Fed’s decision in December.  That said, there are a number of obstacles to tightening, including weak inflation readings and a recent weakening of growth momentum (the obstacle that was tightening FCI is quickly moving into the background), so US data need to pick up in short order in order to make December a truly live meeting. That is a possibility, but we do not think the implied probability in the market is wide off the mark  (the central case at this point is the Fed not going in December),”  Nomura adds.

Risk aversion and flows:

The outlook for risk sentiment matters greatly for the euro. If risk sentiment stays more positive into year end, there is potential for a material pickup in outflows from the Eurozone…All told, an environment of better risk sentiment and greater outflows from the Eurozone is more possible in the next 1-2 months (compared to the previous 3 months). This would tend to exert downward pressure on EUR/USD, even if we do not see substantial new information on the monetary policy front,” Nomura notes.

What’s next for EUR/USD:

“In coming weeks, risk sentiment and US data may be the most important drivers of the EUR/USD cross…If risk sentiment stays more constructive, such that capital outflows from the Eurozone can recover, we would not be surprised to see a move to 1.08 in coming weeks, even if Fed expectations remain fairly stable

A double-whammy of easy ECB, Fed lift-off in December and a re-test of 1.05 seems fairly unlikely, also because the speculative community has limited trading ammunition after a couple of rough months,” Nomura projects.

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