Most of the risk, when it comes to the EUR/USD pair, is in the rear window. It is safe to say that the Euro currency does not face any mammoth immediate threat. Investors are anticipating a move from the European Central with respect to their monetary policy because of abating risk. However, the bank has used a very balanced approach so far. It is also safe to say that inflation remains the biggest thorn for the ECB and the president of the ECB, Mario Draghi has his eyes riveted on it.
The bank has failed in meaningfully nudging inflation closer to its target and they still have a long way to go. Both core inflation and headline inflation rate for the Eurozone has dropped during the month of May. The ECB cannot keep its cards closer to its chest for long and keep delivering a balance between hawkish and dovish sentiment. The growth story over in the Eurozone is a type of a sword which is going to eventually cut through inflation shield that Draghi has been using. The rising tide has for once lifted all boats with all four largest economies of the Eurozone having expanded by at least 0.4 percent in the first quarter. Moreover, the size of the ECB balance sheet is much bigger than the bank of Japan or the Federal Reserve Bank and the bank cannot afford to let this continue.
The fact is that there are more odds in favour of pushing the euro-dollar higher than towards the parity. It is safe to say that you can write off the parity trade because the euro is no longer the weak link. In the short to medium term, we do think that the downside is protected by the level of 1.05 and the upside is capped by 1.15. This range may play for a while and the options market is very much based on this range. In order for the new trend to emerge, we do need to break out of this to make some new waves. In our base case scenario, we see the bank starting the tapering process in January 18. In that case, it would take them nearly seven months to wind up this tent. Having successfully completed this process, we do expect the bank to look at the process of normalising the interest rate process by lifting them up by twenty-five basis points.