We think the EUR is likely to fall towards the end of the year and target a fall in EURUSD to 1.08.
The principal driver of our view is our expectation of a 25bp rate
hike by the US Federal Reserve, which is not fully priced into markets.
In addition, the
European Central Bank is likely to ease monetary policy further at its
September meeting, extending the timeframe of its asset purchase
programme by six months to September 2017. The combination of
Fed tightening and ECB easing should stimulate financial outflows from
the eurozone, weakening EURUSD; we continue to forecast a fall in the
pair to 1.05 by the end of 2017.
The ECB’s July post-meeting statement was little changed from June’s.
While the UK’s vote to leave the EU was described as an additional
downside risk, ECB chief Mario Draghi said the ECB was sticking to its
base-case forecasts of a continued economic recovery and a gradual rise
in inflation. Our call for the next policy step remains a extension of
the asset purchase programme probably by six months to September 2017. We think an announcement should come as soon as the next meeting on 8 September.
The eurozone’s large current account surplus means outflows
on the financial account, in particular portfolio flows, need to be
strong and persistent for the EUR to continue to weaken. These
outflows cannot be taken for granted and are likely to be sensitive to
the broader risk environment. Furthermore, if expectations of EUR
depreciation moderate, outflows are likely to become increasingly
The Governing Council is not closer to being able to demonstrate
convincingly that its current policy settings are compatible with
headline inflation returning to target by the end of the forecast
We look for three ECB policy announcements:
1- We think extension of asset purchases for at least six months would be a first step in the right direction,
2- alongside changes to QE modalities to circumvent any scarcity issues.
also expect a 10bp cut in the refinancing rate to -0.1% to be the first
step, ahead of a 10bp cut in the deposit rate to -0.5% in March 2017.