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EUR/USD manages to stabilize above 1.05 in anticipation of the Fed meeting. This is probably the calm before the storm.

What’s next for the pair?  RBS sees a clear direction down:

Here is their view, courtesy of eFXnews:

In its monthly FX note, RBS urges its clients to not allow familiarity with the stronger Dollar, weaker Euro story to breed any kind of contempt.

“Policy divergence between the United States (moving cautiously, patiently to a first interest rate rise) and the Euro zone (only just starting QE) is the most compelling directional theme that currency markets have had in years,” RBS adds.

A bearish EUR/USD view does not require that the Federal Reserve moves quickly to raise interest rates. That seems unlikely as US inflation is below Fed target. A yet more bearish EUR/USD view from here may require that markets reassess the ultimate scale of ECB balance sheet expansion,” RBS argues.

“Facing a deflationary debt trap, especially in Italy, the ECB needs to continue to drive down the value of the EUR and the level of real yields. Hence we believe that the ECB may ultimately expand its balance sheet to a size well beyond what has hitherto been discounted...We do not believe that current policy settings will be sufficient to get inflation back to target in a world of global over capacity and weak European demand,” RBS projects.

In line with this view, RBS believes there is still plenty of running left in EUR/USD downtrend setting its forecasts at parity by end of Q3, 0.98 by end of the year, and 0.95 by Q1 of next year.  

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