Danske Research discusses its expectations fro EUR/USD into next week's ECB meeting.
"While we maintain that the ECB is priced too softly, the fact that we expect no new rate guidance at this meeting implies that FX markets should take their cue from the ECB’s stance on the cyclical position of the euro zone.
Despite recent loss of growth momentum, if Draghi strikes an upbeat tone due to recent constructive wage developments, it could make room for some EUR support. We do stress, however, that any EUR/USD rally is likely to prove temporary as USD support remains in place in our view from a now rather dovishly priced Fed," Danske projects.
We reiterate our long-held view that as we get closer to the first ECB hike, capital flows will become less EUR-negative as reserve managers are lured back to the euro zone. Indeed, both euro-zone portfolio investment flows and reserve-allocation data (see chart) suggest interest in EUR assets declined as QE and negative rates were introduced. This could reverse swiftly as the ECB ‘normalises’. We are long USD carry at present but positioned for a EUR/USD rebound beyond," Danske adds.