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EUR/USD: prepare to extreme volatility

Euro has continued its rapid decline at the beginning of January: the single currency slid below 1.16, to the lowest levels since 2003.

Next week will bring new obstacles for the euro: the European Central Bank’s meeting on Jan. 22 and Greek election on Jan 25. EUR/USD has already suffered severe losses and is oversold, but if the ECB launches quantitative easing, we’ll see another selloff.

There are several reasons for such scenario. Firstly, inflation is extremely low – euro area’s consumer prices fell by 0.2% in Dec. Secondly, the European Court has given the ECB green light to buy European government debt. Finally, event the big players have started to worry: the Swiss National Bank has abandoned Swiss franc’s cap to euro, obviously fearing that the single currency is doomed to a freefall.

On the other hand, despite the talk about the divergence between the ECB’s and the Fed’s monetary policy, market participants haven’t formed the single opinion about what exactly the European QE will be like. There’s even a risk that the ECB will decide to prolong uncertainty until March. Anyway one can be certain that EUR/USD will have to survive sharp and strong swings in the coming days. The ECB’s inaction may cause a short-term surge in euro, but taking into account the weak state of the euro area’s economy we don’t think that the QE expectations will go away. That’s why our next target for the pair lies at 1.12.

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