BNP looking at post-ECB and pre-FOMC EUR/USD and placing a target for early 2017
This from FX Strategy at BNP Paribas, via eFX
The 8 December ECB announced an extension of its quantitative easing programme (QE) beyond March 2017 as was expected, but at a slower pace of EUR 60bn per month (down from EUR 80bn).
While this was on the hawkish side of expectations, the change was cushioned by a longer, nine month extension of the programme versus previous six month extensions. The ECB also changed the modalities of its programme to allow purchases of bonds with yields below the -0.4% deposit rate and to buy bonds with maturities as long as 1-year. Perhaps most importantly, President Draghi emphasised that the ECB had no intention of tapering towards zero and that purchases could be increased again if necessary. While the pace of purchases has been reduced, front-end yields were lower following the meeting and, with the ECB committed to conducting QE through 2017 even as the Federal Reserve is hiking, the EUR has fallen.
Focus now shifts to the FOMC meeting on Wednesday (14 December). A 25bp rate hike is fully priced by markets, and markets are also close to fully pricing two hikes next year.
With the Fed likely to be cautious about over-committing to further tightening in its communication, we see little scope for this week's meeting to boost the USD further in the short term. However, anticipation of further tightening should guide US rates and the USD higher as we move through 2017.
We expect EURUSD to extend its decline in the New Year, and target 1.04 by the end of Q1.
