BofA predicts limited EUR/USD reaction to upcoming ECB decision

<p>Bank of America believes the European Central Bank is likely to hike rates on Thursday, albeit it's a close call with market pricing at 50%. Despite potential short-term strength in EUR, the bank expects the currency's upside to be limited due to relative economic data and upcoming Fed actions. BofA maintains a year-end EUR/USD forecast of 1.05.</p><p>Key Points:</p><ul><li><p>ECB Rate Hike on the Horizon?: BofA expects a rate hike from the ECB this week, with the market assigning a 50% probability. Even if the ECB doesn't hike, its language is expected to signal that this is merely a "skip" rather than a "pause."</p></li><li><p>Limited EUR Strength: Regardless of the ECB's decision, BofA does not expect a substantial rise in the EUR, given that the market is already pricing in a high likelihood of a rate hike by the end of this year.</p></li><li><p>Impact of Relative Data: The bank suggests that the main driver of EUR will continue to be relative economic data between the U.S. and the Eurozone, where the growth-inflation trade-off has been more favorable for the U.S.</p></li><li><p>Fed’s Next Move: BofA also expects one more rate hike by the Fed in November, which is not yet fully priced into the market.</p></li></ul><p>Trading Recommendations:</p><ul><li><p>Limited Upside: Traders should be cautious of any significant long positions in EUR/USD as the currency's upside is likely to be limited.</p></li><li><p>Watch the Fed: Keep an eye on the U.S. Federal Reserve's actions as an additional rate hike could further pressure EUR/USD.</p></li></ul><p>Implications:</p><p>For Traders:</p><ul><li>Risk Management: Prepare for a possibly volatile trading period around ECB and Fed policy decisions.</li></ul><p>For Policymakers:</p><ul><li>Balancing Act: Both the ECB and the Fed face a balancing act between economic data and inflationary pressures, which will influence their policy directions.</li></ul><p>Conclusion:</p><p>While the ECB's upcoming policy decision might trigger a temporary EUR strength, BofA sees it as a limited move. The key factors driving EUR/USD will continue to be the relative economic data between the U.S. and the Eurozone, along with actions from the Federal Reserve. Hence, BofA maintains its year-end EUR/USD forecast of 1.05.</p><p>For bank trade ideas, <a href="https://plus.efxdata.com/ad/track/4655172E54F06040571CD0AB083845AD" rel="nofollow" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://plus.efxdata.com/ad/track/4655172E54F06040571CD0AB083845AD&amp;source=gmail&amp;ust=1694729842522000&amp;usg=AOvVaw0bW-My94f-a4HXaJqQ2Jnf">check out eFX Plus</a>. For a limited time, get a 7 day free trial, basic for $79 per month and premium at $109 per month. <a href="https://plus.efxdata.com/ad/track/4655172E54F06040571CD0AB083845AD" rel="nofollow" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://plus.efxdata.com/ad/track/4655172E54F06040571CD0AB083845AD&amp;source=gmail&amp;ust=1694729842522000&amp;usg=AOvVaw0bW-My94f-a4HXaJqQ2Jnf">Get it here</a>.

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This article was written by Adam Button at www.forexlive.com.