Paul Robson, Currency Strategist at Royal Bank of Scotland, on EUR/USD

I believe this is not going to have a huge impact on the overall economy, as interest rates were already relatively low. Since the region is suffering from the fiscal austerity and deleveraging, cutting the refinancing rate by just 25 basis points is unlike to have a dramatic impact. If the market embraces the idea that the ECB is going to deliver series of rate cuts, including more importantly a cut in a deposit rate initially by 25 basis points, but potentially up to 50 basis points over a couple of months, I think that would be a more negative signal for the currency. Weaker Euro, however, might help Europe's export-based economy to recover somewhat. On the longer term picture it is all about structurally weak growth in Europe, which is going to be the main concern, and cuts in interest rates do not change that. There is a need of supply side reforms and loosening up on fiscal austerity.  In our opinion, that would be the most important focus during this summer.

To my mind, EUR/USD would be very dependent on the data from both sides of the Atlantic. If the U.S. data continues to recover, the market might price in the tapering of the Fed`s QE policy, and that has potential to spur the Dollar's strength relative to the Euro. On the Euro side it is worth watching the monthly purchasing managers' indexes as a sign that growth remains weak in the Euro area. Firstly, because of the impact that would have on a market expectations for the further policy easing, and secondly, whether slower economic growth makes it harder for regional governments to achieve the deficit reduction goals. If they do not hit those targets, what that would mean for the ECB`s OMT policy? Thus, the data remains extremely important over the next couple of months on both sides of the Atlantic, as that would specify further actions in terms of for monetary policy, but also fiscal policy within the Euro area.

In the very short term we assume that EUR/USD trades around the current levels. The pair might fall a bit lower than that over the next months because the U.S. data looks stronger than equivalent numbers in the Euro area. In the longer term we think that the market has plenty of opportunity to embrace the idea that structural growth in the Euro bloc remains weak, while governments will not hit deficit reduction targets. Thus, fiscal policy and strategy remain the key driver of EUR/USD over the summer. Ultimately, EUR/USD heads lower as people worry more keenly about the Euro area periphery. Therefore, we continue to have a forecast for EUR/USD into the low 1.20s over the next 6 months.