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EUR/USD has shown a lot of stability despite the bearish forecasts and falling inflation.

The team in Westpac sees a significant leg lower in Q1 2015, and sets clear targets:

Here is their view, courtesy of eFXnews:

Westpac is out with its top FX trades for Q1 2015 where selling EUR/USD is one of the core trades on WP’s list. The following is WP’s rationale behind this call along with its strategy to sell the pair.

Rationale:  

Long USD may be a well-owned consensus trade but it remains a good bet into 2015H1. The approach of the Fed’s lift-off from the zero-bound should provide the key near term support for the USD. As the chart across shows, the historical template points to steady gains for the USD ahead of policy tightening, with the USD typically rallying in the six months going into the commencement of policy tightening.

Fed funds profile in Fed tightening cycles

The near certainty of sovereign ECB purchases in Q1, cemented by the paltry uptake at second TLTRO, will make for an eye-watering divergence in Fed and ECB policy.

Strategy:

Our preferred strategy is to be short EUR/USD right here (1.2410), adding to the position on a bounce to 1.2600, targeting initially 1.2000 in Q1 2015 and then the late 2005 lows of 1.1640.

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