EUR/USD about to firm up on euro on stronger economy now? - Nomura

Analysts at Nomura explained that the euro area macroeconomic momentum is clearly stronger now.

Key Quotes:

"In the medium term, EUR/USD should benefit from better euro area fundamentals and from a likely hawkish shift by the ECB."

"However, the transmission mechanism from better fundamentals to EUR is currently not working owing to political risks."

"In the near term, EUR is likely to trade weakly."

Possibility of ECB tapering should attract more market interest

"The euro area economic recovery is now gaining momentum"

"The risk of deflation has clearly declined too, which likely raises market expectations for the end of the ECB’s easing cycle."

"We agree that the risk of ECB tapering is now higher."

"Our economists expect the ECB to start tapering in 2018, while the ECB is likely to begin to talk more actively about the upside risks to the economic outlook sooner than that."

"Immediate tapering is not our baseline scenario."

"In the short term though, a possible hawkish shift by the ECB would probably not create sustained EUR appreciation."

"Tapering could weaken EUR by destabilising bond market."

"As the inflation and economic outlook has clearly improved, investors already likely see a possibility of tapering in 2018. However, any suggestion that the ECB sees a stronger possibility of near-term tapering over the next few months would come as a surprise to the market."

"EUR movement against USD and low-yielding currencies (JPY, CHF) would be complicated, and EUR may not appreciate against them for two reasons."