All about ECB, Fed and EURUSD

12 November,, London – Heading into the Fed and ECB December meetings, Credit Suisse discusses the outlook and risks for EURUSD, highlighting its projections for the ECB, Fed and EURUSD.

Fed and ECB December meetings

Last week’s solid US employment data contributed to the overall bullish USD outlook. With hawkish Fed and solid data, Credit Suisse expects the underlying policy divergence to resume.

“Our US economists believe US macro data are sufficiently robust to allow the Fed to hike by 25bp in December. Our European economists meanwhile see the ECB cutting rates in December.”

Bullish USD into 2016

Credit Suisse does not expect that a Fed hike will end the USD rally. Instead the monetary policy divergence creates the risk of USD “melt up” into 2016 which could even devalue EURUSD to parity within 2015.

Moreover, the cross-currency basis markets are continuously increasing the cost of USD funding. In addition to making long USD positions more attractive from a carry perspective, it indicates probable USD funding shortages.

All about ECB, Fed and EURUSD

Consider reading: New reason to sell EURUSD

3 risks to the EURUSD outlook

Credit Suisse outlines three possible risks that could  interfere with the current bearish EURUSD outlook.

Too expensive USD

March FOMC proved the Fed is sensitive to out-sized USD gains. Having trade-weighted USD up nearly 3% in the past month, we could image the Fed contending with a similar size move in the next few weeks before the 16 December FOMC meeting.

“It remains possible that the Fed chooses to stay on hold under such circumstances, especially if the ECB cuts rates as expected on 3 December,” Credit Suisse argues.

Too cheap EUR

May EURUSD break into new lows ahead of the December meeting, the ECB could decide to hold-off easing given the looser conditions provided by devalued EUR. CHaper EUR was one of the ECB targets in the previous cetral bank meeting.

All about ECB, Fed and EURUSD

A risk-off event

Since EUR has taken on the role of a funding currency, a risk increases for a move up in Euro as funding currencies tend to rally strongly when asset markets are shaky.

“If catalyzed directly by currency concerns such as USD strength hurting US equity earnings – would allow for at least a temporary EUR recovery,” Credit Suisse clarifies.

Forecast for EURUSD

In line with the view Credit Suisse expects EURUSD to trade at 1.04 area in 3-month and at parity in 12-month time.

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