EUR/USD to retest the 1.20-1.21 zone as ECB tapering seems a matter of time – Westpac
EUR/USD has rebounded soundly from short-lived dips below 1.17 and currently trades around the 1.1850 level. The prospect of the European Central Bank (ECB) reducing the pace of PEPP bond-buying could lift EUR to retest the 1.20-1.21 area, according to economists at Westpac.
Inflation upside surprise to allow for PEPP pace reduction
“Higher inflation may allow the pace of PEPP (Pandemic Emergency Purchasing Program) bond-buying to be reduced in 4Q. Some of the rise may be related to base effects, gov’t policies and temporary supply constraints, but the rise above 1.5% YoY in core CPI does suggest that rises may be more persistent.”
“The last ECB staff update to economic projections disappointingly kept CPI stuttering around 1.5% at the end of their forecast period. Therefore next week’s quarterly updates will be even more acutely monitored for signs of upside potential for CPI as well as appraisal of the region’s recent strong reopening recovery.”
“The combination of a pullback in recent USD strength and the potential ECB shift is opening potential for EUR/USD to push back to retest 1.20-1.21 area from what now appears to be a solid base below 1.17.”