EUR upside risks will persist this week give ECB board members increasingly limited room to turn more dovish. Combined with still heightened EUR short positioning, and the potential for risk asset related capital inflows, such factors could lift EUR further next week.
When it comes to the ECB, several members, including Jens Weidmann, have already confirmed it may take several months before it is possible to evaluate latest policy measures’ impact on the economy.
Accordingly, more aggressive policy action such as quantitative easing may only be put the table if serious downside risks emerge.
Specifically, unless a deflation threat rises considerably such ECB policy steps are unlikely to be considered.
All of the above suggests EUR/USD can benefit further short-term in the absence of any meaningful shift in Fed sentiment. We look for EUR/USD to rise to 1.3710 next week.
CA