EUR/USD: A more hawkish Fed and a overdone reaction to ECB – MUFG

Analysts at MUFG Bank are recommending a trade idea of shorting the EUR/USD pair with a target at 1.1300, an entry level of 1.1650 and a stop at 1.1850. They consider the EUR/USD could struggle to build on Thursday’s gains.

Key Quotes:

“The EUR bounced yesterday on a sense that ECB President Lagarde was less than enthusiastic in pushing back current market pricing for rate hikes next year. But senior central bankers rarely comment on specific market pricing and hence we did not view Lagarde as shifting the ECB stance in any way. We are in a market where investors are increasingly questioning the forward guidance of central banks – but we would argue that the ECB is on more credible ground than some of the other central banks and therefore a sustained divergence favouring a weaker EUR is likely to persist going forward.”

“The focus next week will shift of course to the FOMC and while we do not get any formal updated guidance on rates, we will get the QE tapering plan, the statement and the press conference and it is likely that Fed Chair will talk tougher on inflation given developments of late. We don’t expect any huge shift in tone or message but enough to prompt some reversal of the heavy USD selling in evidence in October.”

“Technically, EUR/USD is at an interesting point as well. The downtrend resistance on the daily intra-day chart from the highs in June and again in September comes in a little above the current spot rate (1.1706 today) and that could act to limit the upside over the short-term.”