FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that recently the ECB has provided several strong signals that they are likely to act in early December to enhance this programme culminated with Draghi’s comments this morning. Key Quotes “However, with so much stimulus already in the system there is the risk that Draghi will find it more difficult to engineer a strong market response. One major facilitator in the downtrend in EUR/USD between July 2014 and March 2015 was the build up in long USD positions.” “On first sight it may appear that the fact that the Fed is looking to hike rates in the same month that the ECB is preparing to increase its stimulus should open the floodgates for another drop in the value of EUR/USD. However, while we are of the view that EUR/USD will retain a downside bias we see plenty of reasons for this downtrend to remain moderate.” “Over the past few sessions the Bloomberg spot USD index has dropped around 0.6% from its highs. This is despite the very clear message spelt out in this week’s release of the FOMC’s October minutes and in remarks by Fed Vice-Chair Fischer that the Fed are likely to tighten policy in December. Crucially, investors have begun to look beyond the December FOMC to the trajectory of Fed interest rates through 2016.” “The message from several FOMC members that the Fed are set to hike ‘gradually’ appears to be taking root. USD strength over the past 18 months or so, has already done a lot of the heavy lifting in tightening monetary conditions in the US.” “Consequently, unless US inflation indicators start producing upside surprises, the Fed are likely to retain a very cautious position with respect to policy tightening. This implies that the ECB may have to surprise markets in order to create some downside traction in EUR/USD over the next few months.” “Draghi’s comments this morning hint that the ECB is willing to do what it takes, but with the monetary transmission mechanism not functioning well there is a risk that further stimulus will increasing suffer from diminishing returns. Not only will a paring back of hawkish rhetoric from the Fed make the ECBs job tougher but other central banks could take evasive easing action to prevent the ECB exporting its deflationary risks to them and this could prevent a significant broad based decline in the value of the EUR. For now we are keeping parity in EUR/USD off our forecast table and look for a move to 1.05 on a 3 mth.” For more information, read our latest forex news.