EUR/USD Is A Fed Call For Now – BofA Merrill

In our ECB preview, we argued that the EUR risks from the ECB meeting were to the upside if Draghi was too vague and could not commit to any new policies, which turned out to be the case.

We do not expect a sustained EUR move higher, as markets know that the ECB will eventually extend QE beyond March 2017. However, the days when the ECB was able to weaken the Euro are over. QE does not come across as open-ended any more. It seems that Draghi has to fight for the continuation of the current policy framework step-by-step, which weakens its effectiveness with markets.

For now, EURUSD is a Fed call, as we have recently argued. Looking ahead, the ECB is becoming an upside risk for EUR/USD, and the central bank could even be heading towards BoJ-like challenges in the medium term, with EUR/USD on an upward trend despite QE.

If the US data remains mixed, this could suggest upside risks for our EUR/USD projections-currently at 1.05 by end-2016 and 1.10 by end-2017.