EUR/USD hit new multi-month highs in the wake of the debt ceiling deal as the price action reflected USD-selling on the back of expectations of delayed Fed tapering. In this regard Citibank thinks that EUR/USD could outperform in the near-term targeting a move towards 1.40. Citi outlines 3 reasons behind this view:
1/ EUR may be among the prime beneficiaries given its status as the second most liquid reserve currency. Peripheral risks in Eurozone are no longer rampant like in 2011 and this should add to attractiveness of the euro denominated assets.
2/ USD may suffer more if risk appetite remains supported given that the Fed is implementing its most aggressive easing policy to date and that the tail risks of euro break-up are no longer on the table.
3/ A potential rating downgrade could strip the US off its average AAA-rating. This may force some central banks to rebalance away from UST and move into liquid alternatives like Bunds and
If such a move materializes, then it could be a good selling opportunity as EUR/USD gains may not be sustained as we move closer to multi-year highs of 1.4000, Citi advises. Citi outlines 3 reasons behind this view
1/ In particular the ECB need not tolerate ‘excessive currency gains’ that may jeopardize its inflation mandate.
2/At the same time Citi still expects the Fed to head towards QE exit at some point in early 2014. The diverging policy outlook between accommodative ECB and more data dependent Fed could limit any EURUSD gains and usher the next leg lower in the currency pair in coming months
3/ Another LTRO could be very much on the table before long which would be EUR negative.
Read more: http://www.efxnews.com/story/21279/eurusd-3-reasons-hit-140-st-3-reasons-sell-there-citi
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