EUR/USD is finally getting carried away after the pound flash crash. Where will it fall to? The team at Barclays analyzes:
Here is their view, courtesy of eFXnews:
Volatility in euro markets rose last week on media reports, that the ECB may be discussing tapering its asset purchase program, scheduled to end in March 2017. However, such speculation was quickly denied by Vice President Vitor Constancio. The ECB’s communication this week, including speeches by ECB’s Mersch (Tuesday, Wednesday) and Coeure (Wednesday) will likely also attempt to curb speculation of premature tapering. A unified message regarding the ECB’s ability to continue easing should keep EURUSD in check, in our view. We continue to envision EURUSD at 1.08 by year-end.
The accounts of the GC meeting released last week offer some comfort to our view that the ECB will announce changes to the technical parameters and an extension of QE beyond March 2017, at its December meeting (see ECB minutes: Monetary support still warranted, 6 October 2016). At this stage, we think changes to the size or composition of the PSPP are unlikely before March 2017 and in any case with related communication that reassures markets that policy will remain accommodative for the foreseeable future
In other words, the ECB faces a communications challenge that will be crucial for the future path of the EUR and euro area rates. The challenge is essentially to succeed where the Fed did not during the Taper Tantrum, by convincing markets that a slower pace of balance sheet expansion is still stimulatory.
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