Correlations with data and fundamentals suggest that EUR/USD may have overshot. However, the market is not trading as if it is short Euro. Central bank reserve managers are also contributing to the Euro’s weakness. BofA Merrill Lynch notes in a report on Thursday:
- We are revising our EUR/USD projections, expecting parity by the end of 2015. The current trend poses negative risks to our projections, as EUR/USD could reach parity in 2Q if this pace continues.
- However, further USD appreciation could also raise concerns about the US recovery, possibly affecting the Fed’s timing and pace of tightening and posing positive risks to our projections.
- Our forecast changes are consistent with our expectation that the ECB’s bond purchases will generate EUR negative flows. However, further USD appreciation could also fuel recoupling concerns.
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