EUR/USD starting to trade above levels associated with short term interest rate spreads – ING

EUR/USD is starting to trade consistently above levels typically associated with short term interest rate spreads, according to Chris Turner, Research Analyst at ING and attributes that to speculation of ECB tapering this summer.

Key Quotes

“We think the ECB will have to provide updates on the PSPP scheme either at its 20 July meeting or more likely its 7 September meeting. We have a baseline view that Bund yields break higher in 3Q17, carrying EUR/$ to 1.15.”

“In the US, rates and ineffective Trump policy are holding the dollar back. On rates, there is a huge gulf between market pricing of Fed Funds at end 2018 (+40bp) versus Fed Dot Plots (+100bp). The balance of risks to US activity/inflation points to the Fed moving to the market – and not vice versa. This is neutral/negative for USD.”

“European political risk has ebbed, but Italian elections in 1Q18 may restrain EUR/USD strength – delaying the 1.20 story until 2Q18.”