The sharp drop of the Euro since a year ago was from an overvalued level, which is not anymore the case. The ECB’s open-ended QE was a positive surprise that contributed to the EUR weakness, but strong Eurozone data more recently has forced the ECB to keep pushing against expectations for early QE tapering. While markets were expecting ECB QE for years to come to avoid a Japan scenario, they now doubt whether QE will continue after September next year. Going forward, further Euro weakness has to be the result of better relative data in the US and continued divergence of monetary policies as the Fed starts hiking rates. Therefore, the risks for the Euro will be more balanced, as indeed we have seen in recent weeks. “Despite more balanced risks than before, we remain bearish EUR/USD for the rest of the year, as monetary policies diverge.” says BofA Merrill Lynch
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