FXStreet (Delhi) – Research Team at BAML, note that the recent fundamentals, rate differentials and the recent EM sell-off are consistent with a weaker Euro, but EURUSD remains in a range.
Key Quotes
“EUR/USD has been in a range since the Fed pushed against the strong USD in March. It reached its minimum for the year, slightly below 1.05, on 13 March. It has since fluctuated between 1.10 and 1.15. The ECB has found ways to weaken the Euro whenever EUR/USD threatened to cross above 1.15.”
“However, not-strong-enough US data and the dovish Fed have prevented a weakening of EUR/USD below 1.10. Selling the Euro rallies would have been the best strategy, but this is easier said than done. More recently, the market selloff after China devalued has supported the Euro. In arisky turn for USD we argue the Euro has started behaving like a safe haven currency as it has become a funder. As a result, the unwinding of carry trades has been positive for EUR, against USD and GBP.”
“The Fed’s decision to stay on hold in September overshadowed the dovish ECB meeting and has further frustrated EUR bears. More balanced comments by Fed officials since then have weakened the Euro, but the EUR/USD range remains. We still believe this is a tactical delay and that the Fed will start hiking in December. However, this assumes the market sell-off does not become a self-fulfilling prophecy, threatening the global economy. Indeed, the market is pricing a slightly less than 50% probability of a December hike.”
(Market News Provided by FXstreet)