EUR/USD to hit 1.07 in coming months

EUR was viewed as it was turning into a risk off proxy, highlighting the turn in correlations that means EUR/USD would rally if equities sold off. The late August turmoil was a good chance to see that in practice. EUR/USD squeezed as high as 1.17 and it spent three days trading above 1.15. 

Some point to the Euro area's current account surplus, arguing that is what has turned EUR into a haven. Is 'haven' status is more temporary, linked to positioning, hedging flows and Fed expectations. A closer look at the Euro area's external balance sheet suggests if risk aversion gets a lot worse, at some point markets would revert to USD as a haven, while if things get better, Fed expectations rebuild.  

"On the ECB front, the Sept meeting opened the door for further QE by doing three things, (1) modifying the statement to hint at a longer programme, (2) increasing the issue limit which increases the potential size of QE by roughly EUR300bn and (3) cutting inflation forecasts by more than expected", says RBC Capital  Markets. 

The ECB's message is clear, if things get worse, it can and will act. Though ultimately the current programme may prove enough, there is plenty of scope for the prospect of more QE to weigh on EUR in the meantime.

"EUR/USD is still expected to hit 1.07 in the next 1-3 months. Technically, although EUR/USD remains within a broad 1.0800-1.1500 trading range, the post-ECB break below support at 1.1193 argues for a test of the bottom end of the range. Resistance is at 1.1230/1.1450", forecasts RBC Capital Markets.