Outlook on EUR/USD from Bank of America / Merrill Lynch via eFX
1- "A dovish Fed caught markets off-guard, with even those expecting an on-hold decision unprepared for a perceived dovish tone. Although our US economics team believes this is no more than a tactical delay and expect a hike in December, other central banks may feel that they have a 'license to ease' and markets could now spend the rest of the year speculating about the December meeting.
With the Fed acknowledging increased concern about the global environment, other central banks will likely have to adjust, potentially erring on the side of caution and emphasizing the risk that the Fed waits until next year to raise rates. In our view, the European G5 are not immune to such risks, although each is affected in subtly different ways," BofA notes.
2- "The dovish Fed delays but does not derail our call for parity in EUR/USD. We have revised our EUR/USD end-2015 projection to 1.05 from parity. Our projection still assumes the Fed will start hiking rates in December and the ECB will announce it will extend QE beyond September 2016.
Indeed, our Europe economics team now expects such an announcement at the October ECB meeting. Furthermore, beyond extending QE (in time), odds of an expansion (in quantity) are rising, but we think this particular debate is still very much data dependent. In this scenario, we would expect EUR/USD to reach parity next year, most likely by end-1Q, as the Fed continuously hikes rates every other meeting and Eurozone inflation remains well below the ECB target," BofA projects.
3- "Our projections have upside risks in the short-term (this year), but we are confident about them in the longer term (next year). If the Fed does not hike at all this year and the ECB does not commit to extend QE yet, EUR/USD could appreciate well above 1.15. However, we think this would not be sustainable,"BofA argues.
BofA now targets EUR/USD at 1.05 by year-end and at 1.00 by the end of Q1-2016.
