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According to analysts at Nordea, the European Central Bank (ECB) has paved the way for 1.25 levels in the EUR/USD pair.  

Key quotes

“The ECB refrained from rattling the EUR bull cage as the deposit rate cut remains a tail scenario for the policymakers”. The trade-weighted EUR has roughly traded sideways since August, which is probably comforting for the Gandalf’s within the ECB. As long as EM trades perform, then EUR/USD can also slowly climb higher.”

“The ECB inflation staff projections treat FX very mechanically. A development in line with the 75th percentile in a ‘risk cone’ around the implied EUR/USD forward equals a 0.2%, 0.5% and 0.6% downwards revision of 2021,2022 and 2023 in forecasts. It also means that EUR/USD can move to 1.25 or thereabout during the spring without any repercussions should inflation surprise by 0.2%-points compared to the current staff projection. Not an impossible scenario given how inflation dovish even the ECB staff has become.”