Bank of America Merrill Lynch on EUR/USD

Bank of America Merrill Lynch FX Strategy Research makes an interesting argument on the ECB recent joining of the hawkish turn of most G10 central banks.

"The ECB is a different case and we believe that markets are running ahead of themselves by expecting fast policy tightening. True, the ECB will need to end its QE program next year, as it has made it very clear that it will not increase the issue limit or relax the capital key. However, we expect the ECB to stretch QE as much as possible, which means until the end of 2018, with a very slow pace of tapering.

Recent hawkish rhetoric by Draghi is preparing markets for the normalization of policies that we believe the ECB will announce before end-2017, but this will be a very slow normalization nonetheless," BofAML argues.

In line with this view, BofAML believes that the near-term headwinds to further EUR/USD gains are mounting.

"The current soft patch in US data has been a concern, but we note that US data surprises are approaching levels which have previously marked a reversal, with the spread from Euro Area data surprises historically wide. Moreover, short-term CFTC data that net EUR non-commercial longs are at their highest since 2011," BoFAML adds.

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