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Forex pairs in this Article » EUR/USD (Lisbon) - The Bank of America/Merrill Lynch Investment team weighs mounting EUR/USD risks, coupled with other European events.

Key quotes

“We do not expect any action from the ECB although it could try and flatten further the rate curve. This could be achieved if it signaled a LTRO with a 25bp cut and a narrower corridor if conditions deteriorate.”

Given the lack of concrete policy action, we may well see a similar pattern to GBP rates, where markets rallied into Carney's speech and sold off afterwards. This poses a risk to our underlying steepening view for EUR rates.”

“The risks to the EUR from the ECB are relatively low and investors should continue to focus on the evolution of data Against the backdrop of improving economic conditions (albeit without credit support), the 5 September ECB meeting should strive to flatten the rate curve further by convincing markets that no rate hike or liquidity withdrawal should be priced in until well into 2015.

“The easiest way for the ECB to achieve this is to extend its projections to 2015, with no pick up in inflation to signal it does not foresee any rate hike in 2015. It would be more efficient to set a numerical target for inflation but the ECB looks unlikely to do this at the moment. A rate cut, on the other hand, is unlikely given the improving economic outlook.”
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