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EUR/USD likely to rise to 1.25 by Q2 2019, says ANZ Research

The ECB has attempted to limit the upside for the euro by stressing the link between developments in financial conditions and QE. The market may try to probe the downside in EUR/USD, but demand for euro area real and portfolio assets remains strong. The recent trend and expectations of further firmness in US investment bodes well for US productivity and potentially the USD, ANZ Research reported.

The ECB has announced a cut in QE purchases to EUR30bn a month for the first nine months of next year and updated its forward guidance. The latter is important for FX markets. At the October meeting, the ECB stressed that if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, it is ready to adjust the size and/or duration its QE purchases.

That will allow the ECB time to assess the path of inflation. Owing to base effects, the headline rate is expected to drop sharply towards 0.9 percent y/y in Q1 next year, and the ECB will want to see that recover before tapering or ending QE.

That leaves the focus on the US in coming months, where developments could provide the USD with support. These include a gradual lift in inflation towards the target, evidence of wage pressures building, a sustained rise in business investment which should underpin higher productivity growth and progress towards tax cuts in Congress.

The mercantilist emphasis of the Trump administration suggests it does not favor a stronger dollar, but if inflation, investment demand, and the Fed’s exit strategy are all progressing, then the dollar could benefit, the report added.

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