Euro Rate 28/01: Exchange Rate Outlook for 2014 Does Not Favour EUR Warns Scotiabank

By Sam Coventry

Euro exchange rates are today under pressure - a positive turn-around in global market sentiment has proven to be a negative for the Euro. The outlook remains volatile.

We have seen that recent turmoil in emerging markets has actually benefited the euro with the currency being seen as a destination of safety. With market sentiment turning positive we have seen a reversal in this dynamic and the euro has weakened.

A look at the forex markets shows the euro to be on the back-foot:

• The euro dollar exchange rate (EUR/USD) is trading 0.23 pct lower at 1.3642.
• The euro pound exchange rate (EUR/GBP) is 0.09 pct down at 0.8237.
• The euro Australian dollar exchange rate (EUR/AUD) is 0.94 pct lower at 1.5504.
• The euro New Zealand dollar exchange rate (EUR/NZD) is 0.74 pct lower at 1.6494.

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"The global deterioration of equity markets paused overnight in Asian markets, a day after stocks in the region fell to six-month lows. Slowing growth in China together with Fed’s tapering of QE prompted fresh fears about the outlook for emerging markets," says Ishaq Siddiqi at ETX Capital.

Updated Viewpoint: Camilla Sutton has just updated clients as to why her 2014 outlook does not favour the euro. We believe this is a pertinent viewpoint:

"EUR is weak, down 0.2% since yesterday’s close and flirting with a break below its 50‐day MA of 1.3648. We are EUR bears, not believing that it will remain a strong currency backed by weak fundamentals. We found weekend comments by President Draghi, that the ECB would consider buying private sector loans a clear sign that central bank policy in Europe will prove more accommodative for longer than either the BoE or the Fed.

"This is likely to prove a significant weight against EUR in the second half of this year. Today, fundamental data releases were not the focus, with the core release a softer than expected German import prices, flat m/m and –2.3% y/y."

Outlook for euro exchange rates remains challenging

Global sentiment aside, the technical picture facing the euro dollar exchange rate appears to favour the USD. Analyst Gareth Berry at UBS reminds us that the outlook for the euro dollar exchange rate remains in bearish territory despite the rally in euro rates seen over the past couple of days:

"Despite the recent sharp recovery, the MACD is still below its zero line which is a bearish condition. Only a close above resistance at 1.3746 would extend the strength. Support is at 1.3623 ahead of 1.3508."

However, a note issued by brokerage Charles Stanley argues that the euro is likely to see further gains as the Emerging Market issue has not completely gone away:

"Volatility has begun to rise and this is likely to increase further in the coming weeks as investors attempt to get a handle on what is going on in emerging markets (and how they will impact on more developed markets). For now, further short-term upside looks possible for the single currency and a run up to around 1.38 is relatively likely."

Australian dollar recovers

Its been a seesaw morning in the forex markets as major currencies went their own way with euro continuing to drift lower, USD/JPY rising through the 103.00 figure on better US yields and cable hitting a wall at the 1.6600 barrier after an in-line GDP report.

Only the Aussie performed well against the greenback with the pair rising above the 8800 handle as NAB Business confidence survey showed a marked improvement in December.

"The Australian dollar rose to a high of 8820 in late Asian and early European trade today after the NAB business confidence and conditions showed a rise to 6 from 5 prior with NAB noting that, "Confidence has remained surprisingly elevated following the post-election jump, and could potentially remain at these levels for longer than previously thought given that the conditions index has begun to respond. Nevertheless, the increasing slack in the labour market and limited signs of a turnaround in real activity indicators - in light of the looming declines in mining investment - suggests these improvements may be fleeting, although higher building approvals and recent signs of life in the retail sector are encouraging," says Boris Schlossberg at BK Asset Management.

US data ahead for dollar exchange rates to latch on to

Keep an eye on the dollar later on today.

North American trade today allows the market will get a glimpse of the US Durable Goods orders and Consumer Confidence numbers, "but the action in currencies will likely be dictated by the moves in US yields. Overnight US yields have firmed as some of the concerns over EM turmoil has subsided and that has helped push USD/JPY through the 103.00 figure. If US rates continue to rally into North American trade USD/JPY could push higher towards the 103.50 level while euro could test support at 1,3600 as the the day proceeds," says Schlossberg.