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Dec 01 - 05:55 AM

EUR/USD - COMMENT-Yawning Fed/ECB Divide May Send EUR/USD Much Lower

By Jeremy Boulton  —  Dec 01 - 03:54 AM

The widening divide between European Central Bank and Federal Reserve policy could send EUR/USD much lower and traders and economists are unprepared for this eventuality.

The ECB is pushing back against tighter monetary policy, hoping inflation that has soared far beyond target will recede. nL8N2SL4GS

The Federal Reserve's governor thinks it's time to retire the word transitory and it seems the U.S. central bank may end bond purchases a few months earlier than had been anticipated. nL1N2SL1O5

Against this backdrop traders are yet to bet heavily that EUR/USD drops, mainly because many of them are still long, while economists think the pair goes up. nL1N2SK0GA

Should EUR/USD break under 1.1040, which is a conservative target given it has already dropped 1.2135-1.1186 since the Fed first talked about its intention to taper, it will force a big readjustment.

Potentially EUR/USD could fall under the 1.0340 low reached as a result of the euro zone crisis when traders bet 30 billion dollars on a fall.

Current conditions, which are more favourable for gambling, could see bets exceed those proportions.


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Source:
Refinitiv IFR Research/Market Commentary

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