EUR/USD set to drop towards the 1.10 level as ECB will keep bond-buying – Westpac

EUR is among 2021’s weaker currencies, with its negative yields proving a major headwind in a year of ongoing risk positive conditions. That is unlikely to change in 2022. The European Central Bank (ECB) remains committed to containing rate hike expectations while the eurozone labours under a major Omicron outbreak and surging energy prices are cutting real incomes, economists at Westpac report.

ECB likely to sustain forms of QE

“EUR is likely to remain a funding currency. ECB’s pandemic emergency purchasing program buying should end in late March, but a more flexible add-on to its asset purchasing program will keep flexible QE buying potential in play as ECB still pursues target inflation of 2% into the end of its forecast period.”

“Although some early restrictions in Austria may be lifting, the bias across the region is to renew restrictions. Restrictions were initially focusing upon non-vaccinated citizens. However, the scale of the infections is pushing governments to broaden restrictions and risk adding to the pullback in activity.”

“There has been a notable rise in EU rhetoric towards Russia after a period of near silence. The more vocal stance of EC President von der Leyen has been mirrored by newly appointed Chancellor Scholz. This suggests that the Nord Stream 2 gas pipeline is unlikely to become operational and the subsequent political strains with Russia are likely to act as another restraint on EUR.”

“EUR/USD is likely to struggle to post gains above 1.1350 near-term with 1.1500 acting as a more notable hurdle should USD falter. Risks of a slide towards 1.10 appear more likely.”

See – ECB Preview: Forecasts from 13 major banks, looking for ways to maintain accommodation