EUR/USD: recovers but likely to remain under pressure

EUR/USD managed to end the week far form the referendum lows. The pair bottomed at 1.0910 but then recovered and it was about to end the week above 1.1100. The rally from the lows was capped below 1.1200.

Despite Friday’s sharp decline, in the month the pair is unchanged. It started June trading around the same level it is at the moment. It gained upside momentum after US NFP report and also after the Fed left rates unchanged. Those gain were evaporated today but so far EUR/USD has avoided a daily close under 1.1000.

Fed and ECB after UK referendum

Brexit has already impact on financial markets and among currencies, it weakened the euro. The US dollar rallied but the upside versus commodity currencies was limited. Expectation about a rate hike in the US in July and even in September evaporated, removing strength out of the US dollar. While at the European Central Bank (ECB), officials might be evaluating what to do next if the inflation and economic outlook worsen further.

“In the near term, we expect the ECB to take action within the framework of the QE programme. Potentially it could front-load purchases as soon as today – even without an official announcement. The ECB could also purchase longer-dated bonds or buy more peripheral bonds without announcing changes”, said analysts at Danske Bank. They look for an increase in the monthly purchases to EUR100bn. over the coming one to three months as a response to an unwarranted monetary tightening due to the negative market sentiment. Regarding rates, they do not expect a cut.

The analysts from Danske also expect the Fed to stay on hold for at least the rest of 2016. “Growth will be reduced slightly by higher uncertainty, weaker exports, the stronger USD as well as lower equity markets.”

Even if the Fed does not rise and if expectations of more easing from the ECB increase, monetary policy divergence would continue to favor the USD over the EUR.