For a while now we have suggested that, based on the relationship between the Federal Reserve balance sheet and the ECB's, a 'fair' value for EURUSD is around 1.20. The difference, we felt, was inspired by hope for a sizable (~$700bn 'pure' NEW QE). The last month or so has seen that hope fade (as well as European stress rising as ECB rates align with the Fed's ZIRP) as EURUSD now implies the probability of NEW QE now at only 25% (and falling).
From EUR strength implied by a sizable NEW QE weakness in the USD to the current reality of considerably lower chances of QE anytime soon (and ECB also on hold). With 1.30 implying around $700bn NEW QE and 1.20 'fair', the shift in the last week from from over 1.27 to under 1.23 has cut the probability of a sizable NEW QE in more than half to around 25%.
[4]
Chart: Bloomberg