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The EUR/USD currency pair is expected to appreciate to levels around 1.12 towards the end of the third quarter of this year. The relatively optimistic euro zone economic data and a still relatively decent rate of inflation of 1.8 percent according to Commerzbank’s forecast for 2017 will probably make it relatively easy for the European Central Bank (ECB) to convince the market that tapering is fundamentally justified.
The ECB will probably announce tapering (i.e. a gradual end of its bond purchases, i.e. its Quantitative Easing programme, QE. Tapering equates to the announcement of an imminent end to the ECB bond purchases. Of course the central bank can decide on a slow or fast pace of tapering (i.e. the speed of the reduction in the monthly purchasing volume).
This is not irrelevant as it determines the overall volume of liquidity the ECB creates with its purchasing programme. However, for the currency, the announcement of tapering itself is more important. It illustrates that the QE volume will not be increased indefinitely.
"In 2018 EUR/USD could then easily drop back into the area around 1.04. For market participants with a more medium term horizon, over the coming months the signals sent out by the ECB are likely to support the euro and are likely to fuel EUR/USD in particular, also as USD positive signals are likely to be in short supply," the report said.
The Fed will want to try and avoid USD positive surprises and the US administration is likely to take until the autumn to prepare USD positive tax reforms so as to prevent a similar disaster as the one experienced with the health reform.
