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Scenarios for Fed and ECB December decisions - UBS

FXStreet (Córdoba) - The European Central Bank (ECB) and the US Federal Reserve (Fed) face important decisions to be taken at their policy meetings on December 3 and December 16, respectively. The UBS team summarized their argument for maintaining their EUR/USD forecast at 1.05 in three months, 1.08 in six months and 1.10.

Key Quotes

“The Fed's most important communication in December would not be an actual rate hike, but rather its outlook for further hikes. A surprise decision not to hike rates would be a dovish signal of a slow pace of tightening for 2016”.

“The UBS base case of four rate hikes next year would be understood by markets as a rather hawkish sign. Markets do not yet reflect these expectations”.

“The ECB has several options. Extending the horizon for quantitative easing would be the mildest change. This and a rate cut of 10-20 basis points (bps) is the UBS base case and should not cause concern in the markets”.

“An increase in monthly purchases would initially surprise and lead to initial depreciation pressure on the euro. With a rate cut of more than 20bps the ECB would signal a red alert. Such a strong cut would bring the euro under considerable pressure and would quite likely lead to a drop below parity”.

“The medium-term outcome therefore depends on the Fed's pace of tightening. We expect that only a combination of a strong ECB rate cut and a hawkish Fed would lead to a scenario where EUR/USD dips below parity and stays there for an extended time”.

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