USD: Greater monetary policy mis-pricings in the RoW to weigh - ING

Exchange rates thrive on unpredictability and mispricings – and therefore monetary policy as a driver for currencies packs more punch in economies where the gap between actual policy rates and neutral interest rates is the biggest, suggests Viraj Patel, Foreign Exchange Strategist at ING. 

Key Quotes

“With the Fed tightening cycle all but priced in, the focus is on the rest of the world – namely Europe and Japan – where there is greater scope for positive monetary policy adjustments to lead to further isolated EUR (and to some extent JPY) strength.”

“As such, we still feel that markets remain relatively underprepared for the ECB’s next policy normalisation steps. Any ‘Sintra Part II’ moment will come when EZ policymakers are comfortable to bear the consequences of another broad move higher in the EUR. For us, this is a summer 2018 story; our expectation for German bund yields to breakout – as markets position for the end of ECB QE and the start of a 2019 hiking cycle – should set EUR/USD on a path to 1.30 by year-end.”