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EUR/USD is  lower on monetary policy divergence, but is still hesitant.

The team at SEB explains the next phases:

Here is their view, courtesy of eFXnews:

In its weekly note to clients, SEB Group discusses its projection, forecast, and strategy for EUR/USD heading the FOMC December meeting and going into Q1 of 2016.

December Liftoff A Done Deal:  

“Last Friday’s US Oct payroll data exceeded all expectations increasing by 271,000, compared to a median forecast rise of 185,000.  With the payroll report confirming continued strong demand for labour in the US economy and given previous signals by Fed members. we regard a December liftoff as a done deal.

Indeed, even a weak payroll report in November is unlikely to stop the Fed hiking.  The market has reached a similar conclusion with the probability of a December hike increasing from 57% to 70% following the release of the job market report,” SEB argues.

Probability of Fed liftoff in December 2015

USD Post NFP:  

“The immediate reaction to the strong October employment report was broad-based dollar appreciation. EUR/USD fell to almost 1.0700 from 1.0880.. Although this week has started with a small set-back for the dollar (which is hardly surprising given its strong performance in recent weeks) we are positive on the outlook for the greenback.

While weak or disappointing US growth data could create some temporary setbacks for the dollar, these should be regarded as opportunities to establish long dollar exposures,” SEB advises.  

Buy The Rumor, Sell The Fact:

“The key driver for the dollar going forward is the Fed. With market prices currently discounting “only” approximately a 70% probability of a rate hike on December 16, the Fed clearly has more work to do, as we doubt its members are comfortable that the market still sees such a low probability of a liftoff heading towards the first rate increase of a new rate hike cycle. In addition the ECB is likely to deliver further policy easing on Dec. 3 weakening the euro.

Historically, liftoffs have generally been so well indicated that their actual occurrence was both fully expected and discounted, a situation we expect will recur this time too,” SEB notes.

EURUSD change around starts of Fed rate hike cycles

Consequently,the USD should be supported by hawkish signals from Fed members right up until the rate decision in December. a phenomenon fully consistent with historical developments. Previously, the dollar has appreciated against the euro ahead of the liftoff meeting only to depreciate by almost as much following it,” SEB argues.

In previous hiking cycles (1994, 1999 and 2004) the dollar appreciated by around 7% on average against the euro in the 100 days immediately prior to the liftoff and depreciated by approximately 5% during the same period following the rate decision. This is typical “buy the rumor, sell the fact” behaviour, which we suspect will occur on this occasion also,” SEB adds.

EUR/USD Forecasts:

“To reflect a more positive short-term view on the dollar we revise the EUR/USD forecasts lower. We now expect EUR/USD to trade towards 1.05 in one month time and at 1.05 by end of Q4. Going into 2016 the risk for some temporary dollar weakness could take EUR/USD towards 1.08 by end of Q1,” SEB projects.

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