2013.10.3001:42:00UTC+00Research: Outlook for Eur/usd

Quotes from Credit Agricole CIB:

-First, the current level of EUR/USD is misaligned with relative data surprises. The spread between the European and US data surprises narrowed, suggesting that the recovery in the Euro zone is fully priced into markets at this point. Moving ahead, there is likely upside risk to US growth surprises given the recent deterioration in US forecasts.

-Second, the relative outlook for monetary policy is likely to move in the dollar's favour. That is, we suspect there is more room for the ECB to surprise on the dovish side as the market gets more comfortable with a 2014 taper from the Fed. EUR/USD has sharply diverged from interest rate differentials (and other cyclical factors) while the tightening of euro zone monetary conditions (higher rates and stronger currency) are reaching levels that drew attention from the ECB earlier in the year.

-And finally, the upcoming European bank stress tests could draw concerns about the health of the European banking system, which could force the ECB to issue another LTRO to mitigate funding issues. Taken together, we see little scope for Fed monetary policy expectations to adjust lower (thus less downside bias for short-term rates) while the risks of a more dovish ECB has increased.