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Near-term, Deutsche Bank thinks that the recent pause in EUR/USD drop could extend into year-end with market positioning very extended, real yield fair value still in the high 1.20s, and ECB expectations running ahead of what was delivered at its December meeting last Thursday.

Going out to next year, DB sees more downside to the currency with the risks being skewed to greater, rather than lesser weakness. DB outlines 3 reasons behind this view:

• First, ECB QE remains our baseline most likely delivered in January. The intended effects are likely to be larger and more protracted than equivalently-sized policies in the US or Japan due to the presence of negative rates.
• Second, we expect Fed rate lift-off to materialize over the course of H2, with the dollar historically showing a strong appreciating trend into the first central bank rate hike.
• Finally, we believe next year will mark the beginning of broader capital flow shifts into the US fuelled by persistent growth and increasing monetary policy divergence.

In line with this view, DB targets EUR/USD in 2015 at 1.22 for Q1, 1.20 for Q2, 1.18 for Q3, and 1.15 for Q4.


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