Dr. Valentin Hofstätter, Head of Currency Research at Raiffeisen Bank, on EUR/USD

In our view, the current level is definitely unsustainable. However, we are actually quite optimistic that we could see almost comparably fast drop in EUR/USD this time as we saw at the end of October until early November heading into potential U.S. tapering data on Wednesday's FOMC meeting. It is not even the fact that the Fed might officially announce tapering already tomorrow. We believe that odds are still slightly biased for the U.S. central bank to start scaling back the programme in the first quarter; nevertheless, the wording should already hint even closer to paving the way for QE tapering in the Q1. We do not think that the range will be left already by now, but current levels are unsustainable. However, slight correction that we have recently seen in EUR/USD down from 1.38 could already be a start of a downward trend over the next weeks. Our forecast for the first quarter is 1.35, and afterwards the Euro could fall even lower to 1.31.

In the U.S. all employment data will put pressure on the Fed to act. From the Euro side, I would say that key drivers include everything that would pressurize the ECB into considering further easing measures – be it negative deposit rates or LTRO. Even lower inflation reading in the Eurozone would be a danger for the Euro against the U.S. Dollar. However, that is not something that we forecast. The downward move in EUR/USD that we are expecting is coming more from positive U.S. data and not from further deflationary scenario in the Eurozone, as inflation has bottomed down two months ago and is heading slightly back up to 1% over the next months. However, it would not be enough to support EUR/USD at the current levels as the ECB is so far away from even skipping its easing bias.

The Euro might actually climb back from levels around 1.30 by middle of 2014 toward around 1.35 by the end of 2014. We do not think it will leave the range of 1.40 on the top end and 1.27 at the lower end, which we have seen over last one and a half year. The most important event in 2015, which will be even more crucial than at which levels outside of this range one of the currencies starting long-term trend, is what central bank will be the first one in not only tapering, but also starting to raise interest rates. However, as monetary policy will not diverse so much in 2014, we do not think that we will have lasting trend in one or the other way. Thus, we think that the current levels are unjustified, as we are too close to the upper bound of the range; therefore, we expect the price to correct back in the range. 

We expect it to correct downwards to roughly 1.35-1.36 by the end of this year.