EUR/USD: 4 Reasons For A Drop Towards 1.10 Before Higher - BofAML

Bank of America Merrill Lynch FX Strategy Research discusses EUR/USD outlook and argues that the risks are to the downside in H1 2018 on the following 4 factors : 

"1- EUR/USD has overshot the data.

 2- The market is long EUR and this position could be at risk.

 3- We expect further Fed and ECB monetary policy divergence, which the market has yet to price for the Fed.

 4- The US tax reform will support the USD through fiscal stimulus and profit repatriation; market expectations remain too pessimistic in our view," BofAML argues. 

U-shaped path for EUR/USD: "For H1, we expect EUR/USD to be primarily a USD trade, to a large extent driven by the impact from the US tax reform on the US economy and the FX and rates markets. In H2, we expect the ECB to start dominating as the main EUR driver. 

We expect EUR/USD to weaken to 1.10 in Q1 2018, but then to gradually move towards its long-term equilibrium, 1.19 by end-2018 and 1.25 by end-2019," BofAML projects.