Commerzbank with a wide-ranging note on the EUR/USD strength:

  • Majority of analysts expect lower rates in EUR-USD until year-end and, based on the development since the start of the year, they are incorrect

Will the ECB cut rates again in March?

  • This question is currently occupying the market. Based on the inflation data the answer to this question would be straight forward. Inflation is simply too far below the ECB’s target.
  • BUT …. there is also real economic data, which has has developed much better than expected recently
  • So, recent data has made a rate cut less likely


  • The German Constitutional Court’s recent decision has illustrated that the ECB can’t even dream about normalising its monetary policy….That means for the ECB: It will have to do everything to ensure that the OMT will never be required. The ECB’s ability to act has been limited considerably.

And the Fed?

  • It has started reducing its bond purchases.
  • But clearly it has been unable to completely overcome market confusion about its future approach, as a glance at the 1 month risk reversals in EUR-USD illustrates…
  • That means that so far the markets have not really priced in a change of direction on the part of the Fed.

Against this background it is hardly surprising that EUR-USD has not shown any weakness so far in 2014.

  • However, relying on this to continue is implicitly assuming that the divergence between monetary policies on both sides of the Atlantic will be ignored by the market long term

At present, there is no reason for a change in forecasts:

  • EUR/USD forecasts stand at 1.33 by Q1-end,
  • 1.31 by Q2-end,
  • 1.29 by Q3-end,
  • and 1.28 by Q4-end