Last week, our economics team made two significant changes to their policy rate hike expectations. First, our US economists now expect the Fed to announce a programme of 'incremental' asset purchases targeting a certain amount of flow each month (around USD100bn). They do not expect any upper limit for asset purchases but expect the length of the programme to be tied to improvement in economic data. Second, our European economists now forecast the ECB to be on hold for 2011 (previously we expected a hike in Q211). This change in view is driven by three factors: expectations of further QE by the Fed; further fiscal tightening announced in some countries (France, Portugal); and the upwards pressure on the EUR as an expression of the increasingly bearish USD sentiment. Given these changes, we have accordingly revised our EUR/USD forecasts to 1.42, 1.39, 1.35 and 1.30 in 1, 3, 6 and 12m, respectively (previously, 1.35, 1.35, 1.33 and 1.30). Therefore, we now expect a little more upside in the short run but then forecast EUR/USD to move back lower over the rest of the coming year. We discuss our reasoning for this below. ... |