Monetary policy divergence will eventually weaken EUR/USD more

Normalization of monetary policies will be driving markets for years to come was a common argument. The Fed is expected to lead the way. Other G10 central banks are likely to continue moving to the opposite direction for a while, and then start tightening after the Fed's tightening cycle has advanced. Even if the Fed delays hiking rates, it will be the first central bank to do so.

"The timing of the Fed rate hike and the ECB seriously considering QE2 will determine the EUR/USD path, but the final outcome is a weaker EUR/USD. Selling the EUR/USD on rallies is recommended, as the path will continue being volatile", says Bank of America. 

The ECB, at the other extreme, will have to ease policies further. The ECB is expected to miss its inflation target in the months ahead and start talking about QE2, in the form of extending QE after September next year. 

"Also, the Eurozone's unemployment rate is the highest in G10 compared with pre-crisis levels, and that the Eurozone also has the largest output gap. This suggests that EUR/USD could weaken more and remain weak in the medium term", added Bank of America.