EUR/USD Forecast @ 0.95 in 2016 as ECB and US Fed Diverge

A widenening policy gap between the US Federal Reserve and the European Central Bank will continue to widen, thereby justifying a fall below parity in the euro to dollar exchange rate.

US Federal Reserve and EURUSD exchange rate

When will the US Federal Reserve raise interest rates? There has been a flurry of activity on the 24th/25th September on global FX markets after US Fed Chairwoman Yellen suggested a 2015 hike was still on.

Analysts have been busy recalibrating expectations on US interest rate movements, and by extension movements in the US dollar, after the Fed declined to raise rates at their September meeting.

Barclays have pushed back their forecast for the first US Federal Reserve interest rate rise to March 2016.

"But in light of the uncertainty created by the tension between domestic and external drivers of inflation, we can see why other reasonable people might disagree," says Ajay Rajadhyaksha, Head of Macro Research.

Back in June Barclays said they expected a stronger US economy and improving labour market conditions to lead the Fed to raise rates in September.

"However, the global financial volatility over the summer associated with renewed global growth concerns and China’s surprise change to its CNY fixing regime, as well as the further fall in oil prices changed this," says Rajadhyaksha.

In the face of tighter US financial conditions and lower inflation forecasts during August, Barclays then shifted our forecast for the first rate hike to March 2016.

"We continue to forecast a stronger US dollar, which we expect to appreciate over 5% in REER over the next 12 months, even as the Fed delays its lift-off," notes Barclays' currency strategist Jose Wynne.

Latest Pound / US Dollar Exchange Rates

United-Kingdom United-States

1.3327▼ -0.69%

12 Month Best:


*Your Bank's Retail Rate


1.2874 - 1.2927

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.


Policy Divergence is Key

The bank meanwhile say the European Central Bank could opt to extend its quantitative easing programme in October in what represents a new phase in the divergence in policy between the two central banks. 

"Market measures of medium-term inflation expectations have also fallen in Europe, below the level of August 2014, when ECB President Mario Draghi first flagged the prospect of euro area QE.

"The fact that inflation expectations have returned to such low levels even after the announcement and implementation of the ECB’s QE program is a policy problem for the ECB that will, we think, result in an extension of the existing program before year-end," says Rajadhyaksha. 

Furthermore, if the euro exchange rate complex does not fall the ECB could opt to cut interest rates even further from their present record lows.

The views concerning the US Fed and the ECB confirm divergence in policy will only increase over coming months – this provides the foundation for their negative stance on the euro.

Barclays are forecasting the euro / dollar exchange rate to fall to 0.95 by September 2016.

Euro Week Ahead: Inflation Still Under Pressure

Germany & Euro Area Sep CPI (29 & 30 Sep)

INflation dominates the outlook for the euro complex over the coming week. "We look for small upside surprises to the German and Eurozone CPI releases. For both, we expect readings of 0.1% y/y versus consensus of 0.0%, and a similar risk for core Eurozone CPI, which we expect to come in at 1.0% y/y vs consensus of 0.9% y/y," says a note from TD Securities.

With energy prices having declined so much this year, inflation is expected to remain well below the ECB’s 2.0% goal for some time to come.


EURUSD forecasts

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