The euro / dollar exchange rate profile held at Bank of America Merrill Lynch has been upgraded.

BofA have upgraded their profile on the euro to dollar conversion (EURUSD) just as the euro suffers deep falls against a number of major currencies on the 21st/22nd of September.

Fears that the ECB will extend its quantitative easing programme due to end in September 2016 are rippling through the markets. This confirms that divergence in policy between the US Federal Reserve and ECB will remain the single most important driver of a lower euro.

The extent of those losses remains open to speculation.

“We are revising our EUR/USD end-2015 projection to 1.05 from parity. Our projection still assumes the Fed will start hiking rates in December and the ECB will announce it will extend QE for after September 2016,” says a note from the investment bank.

However, should the ECB announce an extension to the programme it is projected that the exchange rate would fall to parity next year, most likely by end-1Q, as the Fed continuously hikes rates every other meeting and Eurozone inflation remains well below the ECB target.

We have reported here that there are signs that the ECB are starting to communicate to markets that the programme could be extended, so watch this space.

“Our projections have upside risks in the short-term (this year), but we are confident about them in the longer term (next year). If the Fed does not hike at all this year and the ECB does not commit to extend QE yet, EUR/USD could appreciate well above 1.15,” say Bank of America.

However, foreign exchange analysts think this would not be sustainable for the following reasons:

(1) It would be well above the ECB’s FX assumptions in its inflation projections (EUR/USD at 1.12).

(2) The ECB has in the recent past talked the Euro down whenever EUR/USD crossed 1.15, as such a level increases risks to its inflation path.

(3) such a EUR/USD level would be above our estimate of equilibrium, which is 1.16, and would be inconsistent with the diverging US and Eurozone business cycles.

Indeed, the Eurozone has by far the highest unemployment rate in the G10 group and much lower core inflation than the US.

“In our view, the market’s USD position vs the other major currencies is already light and investors will need to start accumulating USD long positions ahead of an eventually inevitable Fed hike. Outside of EUR-USD, we leave our G10 FX forecasts unchanged,” say Bank of America.

The Euro: ECB Triggers Weakness in the Near-Term

"We still believe the EUR should remain an under performer and will be listening to the European speakers later today for any hints about the risk of further stimulus. While we are looking for EURUSD to gradually decline back towards the lows set earlier this year around 1.0450, the recent strong UK data should also keep the GBP in out-performance mode and so remain bearish EURGBP," say Lloyds Bank research.

Support in the former lies at 1.11/1.1090 and in the latter .7240/.7190. We look for a break of these levels to open further weakness.

Peter Praet, executive board member and chief economist of the ECB, told a Swiss newspaper on Monday the 21st that the ECB is ready to expand its program of asset purchases, which currently involves buying €60 billion ($68 billion) in public and private debt every month.

The programme is currently slated to end in September 2016.

The interview echoed remarks from the central bank’s most recent news conference, when ECB President Mario Draghi hinted that more stimulus could be forthcoming.

There is therefore a lot of time between now and the cessation of the programme and thus plenty of time for the EURUSD to gradually move lower towards the 1.05 target forecasted by BofA.