EUR/USD – bearish bias – (1.3275-1.3575).
The negative momentum for the euro continued this week with factors on both side of the pair explaining the move. The escalation of sanctions on Russia raises the prospect of the worsening situation impacting on the euro-zone real economy going forward. As a result and after the 0.4% inflation print today, yields remain very low in the euro-zone. In contrast, the data from the US has been very positive highlighting the potential divergence in economic performance that will likely translate into a monetary policy divergence in 2015.
The week ahead from here will obviously be very much dictated by the employment report tomorrow from the US. We see little reason not to expect more of the same – a steady improvement in underlying labour market conditions – a scenario that should help support US yields and hence also support the dollar.
The ECB meets next Thursday but there is unlikely to be any major surprises although we would expect President Draghi to at least maintain his recent dovish tone and emphasise the oncoming divergence with the performance of the US economy relative to the euro-zone.
We will keep our bias bearish although a lot depends on tomorrow and given the 6 big figure drop in EUR/USD since May, there is a case for soon returning to a more neutral bias.
BTMU