FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the EUR/USD is likely to trend moderately lower medium-term as the dovish tone of ECB President Draghi last Thursday dealt a swift blow to the EUR. Key Quotes “The subsequent indications from ECB Council members Coeure and Praet that they too could be happy for more policy action has increased the odds of stimulus at the December meeting. That said, while this should put the EUR on the back foot, we would argue that it could be difficult for the ECB to reignite the vigorous downside momentum seen in the EUR at the start of the year.” “Ahead of the start of QE in January, dovish commentary from the ECB’s Draghi whipped the market into a frenzy of anticipation about policy action. The ECB’s aggressive measures turned the EUR into a funding currency and heavy short EUR positions were undertaken.” “These positions were reversed in the summer when negative news from Greece and then China weighed on market sentiment. On the assumption that these hefty shorts built earlier in the year have now been normalised there is far less reason to expect that the EUR will continue to exhibit safe haven qualities. These means that on any further shocks to risk appetite, it cannot be assumed that EUR/USD will again move higher.” “That said, assuming that investors are no longer aggressively short of the EUR it is reasonable to expect that further policy action from the ECB will encourage investor to build fresh EUR short positions.” “There is, however, a caveat to this assumption insofar as the carry trade only works well when risk appetite is at elevated levels. Although there has been an improvement in risk appetite in October following a difficult summer, concerns about the outlook for growth in China, in many emerging markets and indeed in the US and Eurozone economies continues to cloud sentiment.” “We expect that investors are likely to be far more cautious in building long positions in higher risk currencies in the next few months meaning that the EUR’s function as a funding currency is likely to be inhibited. We therefore expect that downside momentum for the EUR looking forward will be contained even on further ECB easing.” For more information, read our latest forex news.