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We have moved upwards towards the 1.3130 area, because the concerns regarding the fiscal cliff in the U.S. have not subsided yet. A compromise between the Democrats and Republicans is still far from being reached. This uncertainty is consequently weighing on the U.S. Dollar. Eventually we expect the fiscal cliff to be avoided though with policymakers finding a compromise - even if in the last minute. On the other hand, we had a relatively weak Spanish auction in Europe recently that brought the issue of the unsolved Eurozone debt crisis back up, which had taken a back seat on previous days. This has put EUR-USD under pressure again. Every time the concerns regarding the sustainability of Eurozone debt come to the forefront again, this is weighing on the Euro as the fundamental core of the crisis has not been solved by the ECB's announcement of unlimited interventions. Peripheral countries will continue to suffer from ongoing capital flight which will keep ECB monetary policy ultra-expansionary. Thus, we are still looking for lower EUR/USD levels towards the year end of 2013.
Do you expect the ECB to keep rates on hold at its meeting today?
Yes, we do. We think that there will not be any refinancing rate cut, because what the ECB is worrying about at the moment is the transmission channel of monetary policy. We are not expecting anything in terms of rate cut, thus the momentum for EUR/USD should be very limited regarding the ECB meeting.
Do you await for the Fed to implement a fresh bond-buying scheme at its meeting next week?
If the compromise for the fiscal cliff is still far away and we see a weak labor market report on Friday, this may trigger propping up of QE3 measures at the December meeting already. On the other hand, the Fed could as well wait until the issue of the fiscal cliff is resolved and there is certainty regarding the U.S. budget for next year. There are still chances that FOMC members wait until January before raising the QE3 volume.
What is your forecast for EUR/USD for December 2012 and 2013?
We expect EUR/USD to trade at 1.30 level at the end of this year, because the fiscal cliff is now the main issue that is driving the FX market and will keep the US dollar under pressure. However, in the end, if the fiscal cliff issue is resolved we expect Eurozone issues to drag EUR-USD down to 1.23 at the end of 2013.