FXStreet (Łódź) - Sara Yates, Global Head of FX Strategy at J.P. Morgan Private Bank emphasizes that the research team's 1y EURUSD forecast of 1.33 is based upon rising US yields, not a falling EUR.
"In our opinion, the main reason the ECB is now raising the possibility of QE is that it wants to limit the upside on the EUR from its latest package of measures. These measures are designed to support euro area growth and inflation."
"This is good news for euro area assets. But the more people buy these assets on an unhedged basis, the more the ECB’s measures will also support the EUR!"
"To break this link between inflows and the currency, investors need to be encouraged to hedge. This is what we believe the ECB tried to do through its dovish language and particularly its comments about QE."
"However, in the June press conference itself, Draghi undermined this attempt by dismissing concerns around the strength of the EUR. Last week, the dovish tone was further diluted by news headlines that the ECB “will likely refrain from new measures for the next few months.”
"With the EONIA at just 1.5bps and QE unlikely, we think the downward pressure on the EUR from the ECB’s actions has run its course. Until US yields pick up we expect EURUSD to trade towards the top of its 1.33-1.38 range."