The ECB has taken yet another step towards trying to heal the European economy. However, underlying arguments for further easing measures are still the same: inflation will remain far from target. Although rates are unlikely to be lowered further, the ECB will continue to expand its balance sheet.
But cheap bank financing and targeted purchases of corporate bonds could cause investors to seek investments in these areas eligible for ECB purchases somewhat more actively - though markets are too small to drive the euro significantly higher. For good reasons the euro is probably below its long-term fair value against the dollar. However, our models related to valuation suggest the euro is pretty close to its long-term fair value in trade weighted terms, which the graph below clearly illustrates. In this sense valuation is unlikely to stop the euro from weakening further.
Fed rate hikes later this year work to prevent EUR/USD rallying above 1.12-1.15 (we remain happy sellers up there).
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