Image (C) European Central Bank.

Don’t fight the central banks say strategists at Bank of America Merrill Lynch, particularly when they want to do the right thing.

Fed-watchers have been underestimating the US central bank while markets are currently expecting too much from the ECB, a quandary that will push EUR/USD lower during the months ahead, as traders are gradually proven wrong for having pushed the currency pair to its recent levels.

“The consensus is that the Fed will focus more on low inflation and stay on hold. We argue that the Fed will focus more on loose financial and monetary conditions, as well as risks to financial stability from asset price bubbles, and will continue normalizing policies gradually,” says Athanasios Vamvakidis and his team of FX strategists at Bank of America Merrill Lynch.

Vamvakidis’ commentary could resonate with many given the broad based sell off seen in US dollar currency pairs over the year to date, which has been driven by a consensus that the Fed would pursue a more moderate pace of rate hikes given low inflation and political dysfunction in Washington that has thus-far hampered the economic agenda of the Trump administration.

“Markets are expecting too much from the ECB. The consensus is that ECB QE tapering is inevitable and that there is nothing the ECB can do to weaken the Euro. This suggests asymmetric risks from a dovish ECB. We expect very slow QE tapering and forward guidance linking rate hikes to inflation,” Vamvakidis wrote Thursday, August 31.

BAML’s comments on the Euro may also resonate with traders after the year-to-date rally seen in EUR/USD snapped, with the pair correcting from a peak of 1.2060 Tuesday to a session low of 1.1840 Thursday, driven by stronger than expected growth in the states and a faltering consensus over just what the ECB might do when it meets next week.

“We consider a good, a bad and an ugly scenario for the US and the global economy. The USD should do well in most scenarios, although one would have to be selective depending on the scenario,” says Vamvakidis.

The BAML fx strategy team have recommended to clients that the sell the EUR/USD pair short at or around the 1.1891 level and that they target a deeper retracement back to the 1.1500 threshold. The recommended stop loss is 1.2100.