FXStreet (Barcelona) – Strategists at BofA-Merrill Lynch forecast EUR/USD to gradually weaken towards parity by year-end, and further expect both ECB and Fed to react to any overshooting in the pair.
Key Quotes
“We continue to expect a gradual EUR/USD weakening towards parity by the end of the year. Divergence of monetary policies, as the ECB continues with QE and the Fed starts hiking rates (in September according to our call) should help weaken the Euro further in the months ahead.”
“We have also argued the ECB is more likely than not to continue with QE after September 2016, as inflation remains below its target path.”
“However, we have also been arguing in recent reports that further EUR/USD weakening will be more gradual and more volatile than what took place up to 1Q. The Euro adjustment since May last year started from an overvalued level; the introduction of open-ended ECB QE in particular triggered a sharp correction.”
“Looking ahead, we would expect EUR/USD to move more consistently with data and relative monetary policies, suggesting a more gradual weakening. Indeed, EUR/USD currently seems to be weaker than what the data would justify, and our projections assume better US data in the rest of the year.”
“We also expect both the ECB and the Fed to react to any EUR/USD overshooting, as indeed they both did in recent months.”
“Positive risks to our EUR projections include a Fed rate hike in December or even later, and a comprehensive deal in Greece. Negative risks to our projections include Grexit scenarios and US inflation.”
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