Bar is high for sustained EUR downside

Since the last ECB meeting in early September, EUR is over 1.5% higher on a tradeweighted basis. Indeed, the close on 3 September marked the most recent low in the TWI following a dovish message by Draghi at the press conference. 

The bulk of those EUR gains have been against USD, which is down over 2% as EUR/USD maintained a handle above 1.10. Much of this resilience can be attributed to the recalibration of Fed rate hike expectations following the 17 September meeting.

ECB officials have shown little tolerance for a stronger EUR and we note with interest that the move towards 1.15 in EUR/USD has triggered a flurry of dovish comments from ECB officials. 

Tangible action from the ECB could provide the catalyst for a lower EUR/USD but the flip side is that US economic data need to start delivering positive traction on the policy divergence theme for such a move to be sustained; but so far Q3 releases have been disappointing.

"The ECB and the Fed will ultimately deliver by the year end and push EUR/USD lower. However, there are growing risks to the year-end FX forecasts and headed into next week's meeting the recent resilience of EUR suggests that merely dovish rhetoric will not be enough to meaningfully or sustainably weaken the currency outside of a firm commitment to policy action in December", says Bank of America.