Euro Exchange Rate Forecast to Fall vs Pound and Dollar as Markets Risk Being Wrong on Toothless ECB

It promises to be a big week for the euro as the European Central Bank (ECB) March rate meeting is scheduled on Thursday March 10.

• The euro is firm on Tuesday even as showdown with ECB looms
• ECB is widely expected to ease monetary policy this week yet the euro refuses to fall
• Investors wary of selling euros given the disappointment in December

This promises to be a key week for the euro but we may have to wait until in Thursday's European Central Bank (ECB) meeting for the fireworks to begin.

Nevertheless, market action is fascinating with the euro looking strong against the US dollar and managing to cap the pound's recovery bounce.

Investors want to sell the EUR ahead of Thursday’s ECB meeting but are wary given the disappointment in December as they lean towards more modest stimulus from the ECB.

"However, the ECB’s mantra is to surprise and with positioning now decidedly leaning towards a less dovish ECB," say CitiFX, "shorting EUR is now seen as the better risk/ reward play tactically."

Policymakers at the ECB have made it abundantly clear they will be reviewing and reconsidering the ECB’s policy arsenal, with the likelihood of a stepping up of stimulus measures to help shift the declining trend in inflation.

So something is coming, the question is what, and how much.

"Don’t entirely write-off the risk of the ECB over-delivering on stimulus. The euro would be at risk of a meaningful slide should the ECB fire its bazooka. A weak euro, if sustained, would help the bloc’s battle against low inflation by boosting the cost of imports," says Joe Manimbo at Western Union.

Latest Pound/Euro Exchange Rates

	Live: 1.146▲ + 0.15% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.107 - 1.1116
**Independent Specialist	1.13 - 1.1345 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Uncertainty is the Only Certainty

We have to agree with CitiFX, there is a different feel to the foreign exchange markets in the run-up to this months meeting suggesting the ECB have done the right thing by keeping their cards to their chests this time around.

Analysts are unsure of what to expect on Thursday and it is hard to say whether expectation for a change in policy has already been priced into the exchange rate.

Nevertheless, according to Italian lender UniCredit, the ECB must deliver something big as, “the euro has actually priced in meaningful policy action by the ECB; in that respect, the central bank would really have to go out of its way to deliver a sustainable blow to the exchange rate."

This suggests the euro could well end the week higher against the pound sterling and US dollar.

The consensus base case scenario appears to be for a 10 basis point cut in the deposit rate accompanied by a 10-15bn increase in monthly purchases of euro-area debt.

There also appears to be wide support for a tiered-deposit rate system like that brought in by the BOJ, to ‘soften the blow’ on euro-zone, banks which have complained negative deposit rates are reducing their profitability.

Beyond that, pretty much anything is possible, echoing Mario Draghi’s comments that “everything is on the table,” in the letter he wrote to a Spanish MEP on Tuesday.

"All we know from Draghi's state of mind right now comes from the letter to a Spanish MEP published on Tuesday: in a nutshell he is concerned by the deterioration in the outlook, and everything is on the table," says a note from Bank of America Merrill Lynch.

A wider list of measures the ECB may impose can be found in our article “Ten measures the ECB might adopt to devalue the euro at their March gathering.”

It’s interesting to note that, according to UniCredit, the possibility of the ECB widening their criteria for eligible assets to include Corporate debt is unlikely to have a significant impact because the market is so small:

“An ECB corporate bond purchasing program would face technical challenges, as the volume of potentially eligible bonds amounts to only EUR 400bn. This is tiny compared to the almost EUR 6tn public sector market (EGBs and SSAs) and even less than the eligible covered bond market (about EUR 1tn).”

Pound to Euro Forecast: Mini-Uptrend Wants to Turn into Something Bigger

The down-trend in the GBP/EUR pair was paused at the support lent by the 50-month Moving Average and the 200-week Moving Average at 1.2620 and 1.2640 respectively.

Moving Averages often provide very solid support or resistance to price moves, which means prices are often repelled at MA’s. That two major support levels were in play saw us calling the recovery in the pair in the midst of the early-March 'Brexit selloff.'

The pair then bounced and clearly broke out of its down-sloping channel, eventually reaching its target generated by the breakout at 1.2962. 

It has now pulled back in a small three-wave a-b-c correction, visible on the 4-hr chart, and found support at a minor trend-line.

There is a possibility the pair could resume its mini-up-trend, however that would require a break above the current 1.3002 highs.

It would also require a break above the 50-day MA at 1.3010.

Therefore, a move above the 1.3100 level would, probably provide stronger confirmation of a continuation up to the next target at the R1 monthly pivot level at 1.3184.

Pivot Levels are used by professional traders to indicate points at which prices will encounter strong support or resistance – much like MA’s.

A resumption of the down-trend is also possible although the move down from the head and shoulders topping pattern on the weekly chart, reached its target and the big moving averages in the 1.26s are providing solid support.

A head and shoulders pattern forms at the end of an up-trend when the pair moves up and peaks, pulls back down and then movies up again and peaks at a higher level, before once gain pulling back down to roughly the same level as the previous trough and then moving higher to peak at the same level as the first peak.

This provides the three peaks which form the shoulder and the head.

After that prices are expected to move lower very rapidly, with confirmation coming from a break below the trough lows – also known as the neckline -and a minimum target at the 61.8% extrapolation of the head lower.  

Euro to Dollar Forecast

The EUR/USD pair is still stuck within a long-term range between 1.14 and 1.05.

It recently fell from a peak at 1.1376 in a three-wave move down, to support from an old trend-line at 1.0850, and has since started rising again.

The Non-Farm Payrolls report on Friday has led to an extension of the nascent up-trend which has now moved above 1.10 again, but been repelled at first touch by the monthly pivot at 1.1025 and the 50-day MA at 1.0976.

For more upside a move above the pivot, the 50-day and the 200-day - not much higher at 1.1046 - would be necessary.

Confirmation would be gained by a break above 1.1100, with the 1.1200 level providing the next target.

Alternatively, more down-side would probably come from a move below the 1.0800 handle, with the next target at 1.0700.

Momentum remains in bearish territory, as noted on the MACD indicator in the bottom pane, biasing slightly, further downside.