Nordea FX Strategy Research discusses EUR/USD outlook into year-end and warns of the possible negative impact on the pair from year-end liquidity shrink.
"Basis swaps have been on the move recently, widening aggressively and making USD funding costlier. From now and until the end of this year the usage of the Fed’s reverse repo facility could spike as much as 400 bn $, effectively withdrawing USD liquidity from the banking system.
This is helping make the USD scarcer ahead of New Year, as evident in xCcy basis swaps.
There could be more to come in the next couple of weeks. Usually, this will also tend to have a spot impact on the USD, why we continue to look for further downside in EUR/USD – and we don’t rule out a rapid drop in EUR/USD in the last few weeks of the year – may be as low as 1.14," Nordea argues.