Thursday’s ECB meeting is likely to accentuate EUR weakness, in our view. While we and the market do not expect any change in policy, ECB President Mario Draghi is likely to reaffirm the central bank’s commitment to using extraordinary policy measures to ease monetary conditions, including the prospect of ABS purchases, and address very low euro area inflation. We look for further information regarding the implementation of those measures in the press conference, particularly after data last week showed inflation had declined to 0.4% y/y in July and is likely to reach a cyclical low of 0.3% y/y in August and September (see Euro area inflation: Close to bottoming, 31 July 2014). The DAX underperformance, wider periphery spreads, and lower 5y breakeven are likely to bring questions to Draghi’s press conference this week. Despite some pullback after a softer US employment report for July, our technical strategy team is looking to see sustained downward momentum on EURUSD, having broken pivotal support in the 1.3450 area. They target the 1.3220/50 area or else the 1.3015 area below (Figure 1). From a more fundamental perspective, we continue to forecast EURUSD to reach 1.28 by year-end and see the EUR as our favoured funding currency against selective EM carry, even in a less-than-ideal environment for risk sentiment. Our short EURBRL recommendation has given back gains, and it will likely be at risk this coming week; however, at 3.04, the cross is still far from our recently tighten stop of 3.0793
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