EUR/USD hurt by hawkish Fed – Danske Bank

Chief Analyst at Danske Bank Allan von Mehren gave his views on the recent price action around the pair following the FOMC meeting.

Key Quotes

“EUR/USD fell below 1.19 on the FOMC meeting yesterday. It serves to show that while EUR/USD has been buoyed by strong EUR momentum, the cross is not immune to continued tightening of US monetary policy”.

“As the market is now pricing in a 60% probability of a December rate hike there should be limited further support to USD from tightening of US monetary policy. Hence, the dip in EUR/USD should prove shallow and short -lived and we look for it to recover to 1.20 in the short term”.

“The ECB’s Mario Draghi is set to speak today and he may provide the market with arguments for buying EUR again if he touches upon the ECB’s eventual exit strategy. Furthermore, we stick to our 12M forecast of 1.25”.

“In addition, USD liquidity could start to tighten substantially around mid-2018 when the Federal Reserve’s balance sheet run-off accelerates. That could lead to a widening of EURUSD CCS and increase cost hedging USD assets and income”.