Bank of America believes the European Central Bank is likely to hike rates on Thursday, albeit it’s a close call with market pricing at 50%. Despite potential short-term strength in EUR, the bank expects the currency’s upside to be limited due to relative economic data and upcoming Fed actions. BofA maintains a year-end EUR/USD forecast of 1.05.
Key Points:
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ECB Rate Hike on the Horizon?: BofA expects a rate hike from the ECB this week, with the market assigning a 50% probability. Even if the ECB doesn’t hike, its language is expected to signal that this is merely a “skip” rather than a “pause.”
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Limited EUR Strength: Regardless of the ECB’s decision, BofA does not expect a substantial rise in the EUR, given that the market is already pricing in a high likelihood of a rate hike by the end of this year.
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Impact of Relative Data: The bank suggests that the main driver of EUR will continue to be relative economic data between the U.S. and the Eurozone, where the growth-inflation trade-off has been more favorable for the U.S.
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Fed’s Next Move: BofA also expects one more rate hike by the Fed in November, which is not yet fully priced into the market.
Trading Recommendations:
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Limited Upside: Traders should be cautious of any significant long positions in EUR/USD as the currency’s upside is likely to be limited.
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Watch the Fed: Keep an eye on the U.S. Federal Reserve’s actions as an additional rate hike could further pressure EUR/USD.
Implications:
For Traders:
- Risk Management: Prepare for a possibly volatile trading period around ECB and Fed policy decisions.
For Policymakers:
- Balancing Act: Both the ECB and the Fed face a balancing act between economic data and inflationary pressures, which will influence their policy directions.
Conclusion:
While the ECB’s upcoming policy decision might trigger a temporary EUR strength, BofA sees it as a limited move. The key factors driving EUR/USD will continue to be the relative economic data between the U.S. and the Eurozone, along with actions from the Federal Reserve. Hence, BofA maintains its year-end EUR/USD forecast of 1.05.
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This article was written by Adam Button at www.forexlive.com. Source