BofA: breaking the EURUSD boundaries

01 October,, London – Ever since the Fed had pushed against the strong USD in March, EURUSD has been trading in range. Bank of America Merrill Lynch has analyses the markets and presented possible triggers to break EURUSD boundaries.

Euro reached its 12 year low, marginally below 1.05, back in 13 March. It has since traded in range bounded by 1.10 and 1.15 levels. The ECB has talked down the EUR whenever EURUSD threatened to trade above 1.15, notes BofA. However, dovish Fed and soft US fundamentals have prevented EURUSD to drift 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,” BofA argues. Looking ahead, couple possible Euro range breaking triggers could be identified.

USD reserves

The USD reserves at EM central banks across the globe have hit the bottom low and eventually will need to refill the US Dollar reserves back. Following China’s CNY devaluation and the loss in EM reserves due to devalued oil since the end of last year, based on the published data, EM central banks have lost at least $320bn since March – equivalent to 4.3% of total EM reserves. This is the largest loss in since 1995 when the data started to be collected.

Therefore, a possible buyback of USD for a healthy portfolio would provide the dollar an upper hand.

ECB QE and Fed end-2015 hike

BofA’s baseline for both central banks imply further monetary policies divergence this year. Which is currently not fully priced in the markets. “We expect the Fed to start hiking in December, while the market gives a December hike only a probability of slightly less than 50%” the major bank notes.

EURUSD boundaries

Furthermore, “we expect the ECB to announce QE2 (extend QE for after September 2016) in its October meeting, while the markets are pricing the ECB to start hiking in a year from now.”

If both are true, EURUSD could break the lower barrier of 1.10. Yet, extend of the downtrend will depend on the Fed’s and the ECB’s policy reactions following respective policy changes, BofA projects. Nevertheless, the bank targets EURUSD at 1.05 by the end of 2015 and at parity in Q1 of 2016.

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