UBS - "We believe euro bulls should buy euro crosses like EURGBP and EURJPY rather than EURUSD. First, the Fed is set to end quantitative easing this year. Second, Eurozone policymakers are more apt to comment on sharp EURUSD rises rather than increases in the other euro crosses. This was demonstrated by French President Hollande arguing 'the euro should not fluctuate according to the mood of the markets' and by European Central Bank President Draghi saying 'the exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained, will alter our risk assessment as far as price stability is concerned.'
Draghi's comments caused EURUSD to end the week below 1.34, having been at a fifteen month high of 1.37 at the start of February. Draghi also tempered the bullish outlook he gave at the previous meeting of the ECB Governing Council in January by claiming 'the risks surrounding the economic outlook for the euro area continue to be on the downside' and that while inflation risks were balanced, there were 'downside risks from weaker economic activity and more recently, the appreciation of the exchange rate.'
As a result Draghi suggested the ECB may downgrade its economic forecasts when it updates them for the March Governing Council meeting. Combined with Spanish Prime Minister Rajoy facing corruption allegations over political party funds and former Italian Prime Minister Berlusconi surging in the polls before elections on February 24-25, the euro is likely to trade in a 1.30-1.37 range over the next few months rather than trending higher towards 1.40 against the US dollar."
Mansoor Mohi-uddin, Managing Director and Head, Foreign Exchange Strategy at UBS Macro Research.