20 November, AtoZForex.com, London – Although BNP Paribas expects EURUSD to test 1.05 level, just above the 1.046 year to date lows, in the coming weeks, the year-end forecast remains at 1.06 as scope exist for the pair to squeeze higher in the aftermath of the key event in December.
Here are two primary reasons why BNP Paribas advises caution on EURUSD in adding to short positions ahead of the December events.
ECB easing is, or might be, priced before the meetings
BNP Paribas expects a number of monetary easing measures to be introduced by the ECB, including a 12-month extension until September 2017 with a EUR 10bn increase in the monthly budget of the QE program, and a 10bp deposit rate cut.
However, “we believe this is largely priced in to the rates market now and, by extension, into current exchange rates,” BNP Paribas argues. In particular, “we note that forward EUR OIS from December 3 is now trading near -25bp, more than 10bp below the current spot EONIA rate.”
Fed and ECB are explicitly sensitive to exchange rates
Due to EUR importance to the ECB, as EURUSD decline so too does the pressure on the central bank to deliver the expectations at the December meeting.
Consider reading: Goldman Sachs EURUSD December targets
However, Fed officials have also indicated that they see the strength of USD as a factor slowing economic activity and weighing on inflation.
Bottom line – EURUSD outlook
The risk of a “buy the rumor, sell the fact” phenomenon for both policy meetings in December suggests caution.
“All in all, while we remain firm medium-term EURUSD bears – expecting the pair to hit parity in H2 2016 – we do not see attractive risk-reward in chasing EURUSD lower into year-end 2015,” BNPP projects.
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