Euro Exchange Rate Recovery Could be Short-Lived
The euro exchange rate complex powered higher after the ECB refused to be rushed into any extra measures aimed at boosting the Eurozone economy.
"Depending on how risk appetite reacts, we see EUR/$ downside up to 10 big figures" - Robin Brooks @ Goldman Sachs.
"Our bias is still for EURUSD to head down to the 1.0450 previous lows." - Lloyds Bank.
The euro has been under pressure of late as traders became nervous that the central bank would announce new stimulatory measures - good for the Eurozone economy but bad for those hoping for a stronger euro.
The euro to dollar exchange rate fell back towards the 1.10 support zone as nerves set in.
Appearing before the European parliament on Wednesday the 23rd ECB President Mario Draghi failed to deliver any concrete plans for an extension of the asset purchase programme (quantitative easing).
The euro shot higher on this outcome with the euro to pound sterling exchange rate back above 0.73 - levels which look rich to us.
This Strength Could be Fleeting
Can the euro expect further support from the ECB? We doubt it and believe the central bank are dropping significant hints that further action lies ahead.
"Should some of the downwards risks weaken the inflation outlook over the medium term more fundamentally than we project at present, we would not hesitate to act," said Draghi.
This strength in the euro will not be welcome at the ECB who have become increasingly vocal in an effort to try and keep the exchange rate down.
Latest Pound/Euro Exchange Rates
  | Live: 1.1448▲ + 0.04%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1059 - 1.1105 |
**Independent Specialist | 1.1288 - 1.1334 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Euro Forecast Lower by Leading Institutions
On the back of today's non-event we see the possibility that the euro will remain elevated around current levels in the near-term but an inevitable fall will ultimately be initiated by the ECB.
Bank of America Merrill Lynch have told clients that avoiding more euro re-appreciation is the short run priority at the ECB – a weak euro is QE’s most tangible result.
"In our view, announcing that QE will continue beyond September 2016 would be a powerful form of forward guidance, allowing to maintain a suitable "policy gap" with the Fed," say BofA.
The view is echoed by Goldman Sachs who suggest the programme could run into 2017:
"Our economists now expect a continuation of QE into mid-2017, well beyond the original end date of September next year.
"Much as in the run-up to the initial QE announcement in January, there are many voices that say this extension is "in the market" and priced. We do not think so. Depending on how risk appetite reacts, we see EUR/$ downside up to 10 big figures," says Robin Brooks at Goldman Sachs.
BMO Capital's Chief Foreign Exchange analyst Greg Anderson has warned clients that at 1.13, EURUSD is about 3% above the ECB’s 2016/17 assumptions.
"Partly as a consequence of that issue, we expect the central bank’s dovish rhetoric to persist for the foreseeable future," says Anderson. "If necessary, the ECB will increase dovish rhetoric and if EURUSD were to reach 1.20, we think the ECB would ease policy further."
Under BMO's core scenario of calming asset markets and a December Fed hike, we expect EURUSD to fall back to 1.09 by year’s end.
Lloyds Bank also hold a longer-term negative bias on the euro:
"The recent bout of weakness in the EURUSD has seen support around 1.1100 hold again. We will be watching the sentiment data out of Germany this morning closely to gauge whether we get a stronger rebound back towards more important resistance around 1.1250, or come back under pressure to test and break this support. Such a break should open a move towards further technical support around 1.0990, ahead of key support in the 1.0825/00 region. Our bias is still for EURUSD to head down to the 1.0450 previous lows.
