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EUR/USD: SLR Call In The Driver Seat For EUR/USD Direction – Danske


What is the outlook for EUR/USD?

Here is their view, courtesy of eFXdata:

Danske Research highlights the importance of the Fed’s decision on the exemption of bank reserves from the supplementary leverage ratio(SLR) which set to expires on March 31.

“If the exemption of reserves ends on 31 March, it risks making the SLR a de facto binding constraint on banks’ balance sheets. Hence, for every new reserve Fed creates to fund its QE buying, banks would have to raise more capital to subsequently supply new deposits; hence, create money,” Danske notes.

“The effective lower bound on rates already hampers ECB’s inflation creation abilities; hence, bullish outcomes for EUR/USD rely on Fed pushing US inflation above 2% and delivering on its new average inflation target (AIT). That objective may in turn suffer from lack of credibility if it requires banks to count reserves against their SLR again. In various, speeches and interviews recently, Fed chair Powell has stressed Fed will not repeat the mistakes of high inflation from the 1960s and 70s. That risk would greatly diminish along with the most bullish outcomes for EUR/USD with the end to capital relief,” Danske adds.

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