ECB's policy easing may break EUR/USD trading range to downside

The ECB is likely to extend its time-based commitment QE for an additional 6-9 months (ie, through March or June 2017). The greatest effect of this policy change would be to push 2-3 year Eonia swap rates closer to the ECB deposit rate floor of -20bps as the risk of a reversal of ECB balance sheet expansion policies is pushed further into the future. 

"EUR/USD is expected to depreciate both in response to the decline in relative rates and the refocusing of market attention on the chasm between euro area and US growth prospects. Alternatively (or additively), the ECB may increase the pace of monthly purchases", says Barclays.

While it may have some of the same signalling effect on the EUR, a little impact is expected on euro area rates from such action. Finally, there also is a low, but non-negligible risk that the ECB cuts its deposit rate further into negative territory, more likely as a secondary action should the euro appreciation persist. 

"A further cut is expected in deposit rates to have the greatest negative impact on the EUR as it would remove the lower bound on interest rates, and represents a downside risk to our EUR/USD forecasts", added Barclays.