"Upside risks to our forecasts for the euro" Say Intesa Sanpaolo Exchange Rate Forecasters
Intesa Sanpaolo is looking to revise their euro exchange rate forecasts higher suggesting that the maximum in the pound to euro is closer than previously predicted.
Updated: ABN Amro also announce upgrades to euro predictions for near-term.
A theme we are covering at present is the decidedly positive shift in sentiment towards the euro in the wake of recent global market events.
The euro appears to be a beneficiary on concerns that the the US Fed and Bank of England will delay interest rates. To be sure, such strength will ultimately be fleeting in nature as these interest rate rises will inevitably come.
Rather, of more interest to us is the improving economic backdrop in Europe which is where the fundamental underpinning for the euro family's recovery will be derived.
Indeed, UniCredit Bank’s Marco Valli confirms “we are comfortable with our view that economic activity will pick up momentum in the second half of the year, expanding at a pace of about 2% annualised.”
“With most of the developed world growing at reasonable pace and the bulk of past euro depreciation set to feed through in 2H15, growth prospects in the eurozone remain favourable.”
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Intessa Sanpaolo: Upside Risks to Euro Forecasts
Fellow Italian bank Intesa Sanpaolo caught our eye this week when they announced they may raise their euro forecasts over coming weeks.
“Upside risks to our forecasts for the euro on the subsequent scenario, from 3m onwards, have increased. Specifically, the expected low point may have to be revised upwards, from EUR/USD 1.05-1.04 at present. The necessary conditions to trigger this revision are a potential non-hike decision by the Fed in September, and/or the exacerbation of the Chinese “crisis”, with the resulting negative effects on global growth and on energy prices,” says Asmara Jamaleh at Intesa Sanpaolo.
Sterling, on the other hand, was relatively unfazed by the spreading of the Chinese turbulence in its direct relation with the dollar, against which it rose moderately, from GBP/USD 1.56 to 1.58.
With regards to the pound sterling the GBP could still hold the upper hand as Jalaleh says weakness should prove temporary.
“The prospect of the BoE hiking rates after the shortly after the Fed leaves the pound in a position of relative strength against the single currency. In light of this, we confirm our scenario by which sterling should rebound against the euro on a 1m-3m horizon,” says Jamaleh.
At present Intesa Sanpaolo are forecasting the euro to dollar conversion to be at 1.04 in 3 months and back to 1.12 in 6 months. In 24 months a recovery to 1.20 is forecast.
The euro to pound sterling exchange rate is forecast at 0.68 in 3 months, 0.70 in 6 months and 0.74 in two years from now.
ECB Could Front-Load and Hurt the Euro
One issue that could prove problematic for the analysts at Intesa is the ECB which could be wary of recent strength in the euro.
ECB Chief Economist, Peter Praet, delivered forceful remarks yesterday that downside risks to inflation had increased.
This will lead to expectations of ECB staff CPI forecasts being cut next Thursday and raises the prospect of front-loaded QE.
"He was the man who, embarrassingly for the ECB, broke the story of front-loaded QE back in April in response to the Bund sell-off – comments were made at a hedge fund dinner," points out a note from ING bank.
Front-loaded QE refers to the ECB accelerating their programme of quantitative easing, previous suggestions of the use of this tactic has really hurt the euro in the past and could do so again.
"Any fresh hint of front-loaded QE today could push EUR/USD below key short term support at 1.1320 (200 day m.a.) and add to the tentative view that Monday’s 1.1714 high was the extent of the correction. A close today above 1.1400/1440 suggests the correction may still have further to run," say ING.
Euro Overvalued Against Pound Sterling
GBP has been under-performing on the back of the equity sell-off, where the large weight of financial services in the UK economy typically weighs at times like these.
“Despite this sell-off, we still think EUR/GBP is far too high at current levels (again UK hard data should hold up) and we still see value in returning to long GBP/SEK positions,” say analysts at ING in a morning briefing to clients.
