EUR/USD: Any dip should be shallow and short-lived – Danske Bank

Analysts at Danske Bank suggest that it remains their base case that the ECB will, at the October meeting, announce the QE programme will continue in H1 18 albeit at a reduced pace of EUR40bn per month.

Key Quotes

“There was a lot of focus on the strong EUR at the meeting, but despite Draghi’s effort to sound dovish (not least as the ECB revised down its inflation forecasts for 2018 and 2019 by 0.1pp due to the EUR appreciation), he could not talk EUR/USD down and EUR/USD ended higher than it started, despite a rally in EUR fixed income. The EUR momentum is strong and looking at IMM positioning data, investors are short USD and long EUR. Still, the market will keep in mind that the ECB is unlikely to tolerate further EUR appreciation in the short term, which should put a soft cap on EUR/USD ahead of the October meeting. However, we think any dip should be shallow and short-lived and still look for a move higher in EUR/USD in 6-12M, as upside risks dominate. Equity flows and speculative positioning, rather than relative interest rates, have been key to explaining EUR/USD movements this year.”

“The euro fixed income market rallied after the recent ECB meeting (especially in the periphery), as the EUR is the key variable at the moment. The more the EUR appreciates, the more likely it becomes that the ECB will extend its QE programme and postpone hikes. We think EUR yields will continue to range trade for the rest of the year but think markets will begin to price in an ECB tapering premium next year.”