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From Deutsche Bank insights :

ECB tapering is not simple

One of the pushbacks we get to our weaker euro view is that the ECB will signal tapering this year preventing EUR/USD weakness. We don’t agree. First, tapering is not necessarily bullish for a currency. When the Fed signaled taper in mid-2013 the dollar strengthened a lot against EM but it weakened against both the euro and yen. Aggressive bear steepening and rising fixed income volatility tend to slow down inflows and are not universally beneficial to a currency. Indeed, such a relationship can be seen between bund volatility and
European fixed income inflows over time (chart 1).
Second, ECB tightening is not that simple. Not only would it steepen curves but it risks a return of redenomination risk that has been conveniently compressed by the ECB’s fight against deflation. Take the lowflation excuse away and add back the political risk of a potential 2018 Italian election and the removal of the QE backstop looks much less positive. Indeed the correlation between EURUSD and Italian peripheral spreads has already turned negative: wider spreads via less QE are not a euro positive (chart 2).
Finally, EUR/USD is not just about the ECB but also the Fed and the level of US yields. In previous work we have shown that the dollar is most sensitive to shortend yields both in terms of direction and absolute level. With the dollar having transitioned to a high-yielder and even more Fed hikes to come, the greenback should be doing a good job of attracting inflows and deflecting its use as a funding
currency to both the euro and the yen. The dollar has had a tough start to start the year but we are not giving up on our bullish view for 2017

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