Bank of America Merrill Lynch discusses a couple of short-term risks for EUR/USD. BofAML target EUR/USD at 1.08 by year-end.
"The market has been focusing on the US-China trade talks, but we are also concerned about the US-EU trade talks this fall. The last truce pushed the deadline to November. Negotiations between the US and the EU have not even started yet, as the new leadership of the EU Commission is about to take over. The most difficult discussions in our view will not be about the auto industry, but about agriculture. Our baseline is for another truce, but risks for escalation remain. Starting from an already weak position, particularly in export-oriented Germany, an escalation in trade tensions with the US will be a severe shock for the Eurozone economy and weaken the EUR, in our view," BofAML notes.
"We are also watching very closely recent USD funding pressures. Our rates strategists have argued that to control funding markets the Fed may need to move beyond IOER tweaks and use its balance sheet. Depending on the details and whether the Fed is forced to outright UST purchases beyond one-off operations, the USD could weaken in the short term. Although this is not our baseline, the market may initially see outright UST purchases as QE, despite not being motivated by monetary policy considerations," BofAML adds.