In its weekly FX pick to clients, Barclays Capital advises clients to stay short EUR/USD and to sell bounces into this week’s FOMC meeting on Wednesday and into the ECB’s announcement of the first series of TLTRO results on Thursday.

On this week’s FOMC and its impact on the USD,:

“We will likely see a modest hawkish shift at the FOMC meeting on Wednesday, mainly from the Fed’s upward adjustment in dovish dots, and expect it to provide additional support for the USD. In their Summary of Economic Projections, the unemployment rate forecast is likely to be revised lower while the inflation forecast is likely to be revised higher, reflecting the improvement in economic conditions since June FOMC. These changes in forecast should result in upward shift in the Fed’s FF rate forecast and such a move will confirm our view of medium-term USD strength,” Barclays projects.

“There is a risk that lack of hawkish shift in these words may weigh on the USD in the very near term after strong across-the-board rally in USD, but we prefer using any dip as an opportunity to buy USD, especially against a currency where the central bank is expected to maintain accommodative policy stance such as the EUR.” Barclays adds.

On this week’s ECB’s announcement of the first series of TLTRO results and its impact on the EUR, Barclays’ view is as follows:

“The EUR is likely to remain under downward pressure this week as the ECB announces the first series of TLTRO results on Thursday. Our rates strategists expect an initial take-up of EUR 114bn, which could result in about EUR 70bn of new liquidity, with an additional EUR154bn likely to be taking at the December TLTRO and resulting in a further EUR100bn of new liquidity,” Barclays projects.

“We think ECB will continue to adopt a “whatever it takes” approach, which should keep euro area interest rates low for a long time, ultimately push inflation higher and see real interest rate differentials shift against the EUR. Against this backdrop, we now expect a large, multi-year downtrend in the EUR, forecasting EURUSD down to 1.10 in 12 months,” Barclays adds.

In its portfolio, Barclays maintains a short EUR/USD position from 1.3280 targeting 1.2815, with a stop at 1.3438.

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