Will the end of QE be the bigger priority?
While the forward rate guidance should see US:EU policy divergence continue for another twelve months, this story looks largely priced in and it feels like the euro sell-off is a bit of an over-reaction. Of course, the ECB has to manage the exit from QE very carefully – which they’re doing through aggressive forward guidance. But we tend to think that, over time, the announcement of the end of QE will emerge as a bigger story – and that in the last quarter of this year and 1Q19 the short end of the EUR curve can start to narrow the spread with its US counterpart. EUR/USD should be pushing back above 1.20, possibly to the 1.25 area by that time. Helping this story should be the return of portfolio flows - particularly long-term debt portfolio flows - to the Eurozone. These were sent off-shore by the ECB's QE programme starting in 2015 and the anticipation of their return should support the EUR over the coming 1-2 years. In general, we see the lower end of EUR/USD trading range in the 1.15/16 area this summer.