Act III, Scene I
The FX market’s most liquid currency pair does not fall easily. In 2010, it took the threat of a Greek sovereign default to trigger a sharp decline in EURUSD. In 2012, the inconclusive outcome of the first of Greece’s two general elections did the damage.
This time around, the threat of Eurozone deflation – and the policy response which might be provoked to avoid it – has the potential to push EURUSD closer to our end- 2014 forecast of 1.25. To be clear, UBS economics does not anticipate a descent into
deflation, and our colleagues also expect the ECB to keep policy rates unchanged at Thursday’s meeting. However, with inflationary pressures subsiding again in January, FX investors are already allowing for the possibility that the ECB will act on its easing bias at some point. And, as the ECB proved again at the Nov 7th meeting, surprise rate adjustments can occur even outside the ECB’s quarterly forecasting round.
Read the full report: UBS