Euro's Recovery Potential Increasingly Compelling say Strategists

Foreign exchange rates

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The Euro has been under pressure against the US Dollar since April, but we are told that the EUR/USD exchange rate is still likely to end the year higher than at current levels.

Foreign exchange strategists are seeing value in the Euro against the US Dollar at current levels and maintain a belief that the worst of the single-currency's losses might have now passed.

Investment bank UBS have recently downgraded their year-end forecasts for the EUR/USD, but that does not mean to say they do not expect a recovery in the exchange rate over coming months.

Indeed, a top-end forecast target of 1.30 remains alive.

"The pace at which the EUR can appreciate from here is less rapid and for that reason, we have recently lowered our year-end forecast from 1.30 to 1.25," says Themos Fiotakis, a strategist with UBS in London.

UBS will be watching Eurozone growth trends closely saying if the recent slowdown ends and growth stabilises and the Eurozone's unemployment rate continues to drop, "the downside risks to the EUR are small and the upside risks are more pronounced," over coming months.

The UBS market thesis remains that the Dollar is expensive and is unlikely to get an extra boost from the Federal Reserve, as the market is pricing future interest rates at the Fed nearly fully. Currencies tend to move higher when the market prices in fresh interest rate rise moves in the future; existing information on future Fed moves is therefore arguably fully incorporated in the price of the Dollar.

"At the same time, the EUR is broadly cheap and the convergence of the European cycle to the US cycle should drive the EUR to 1.30 in the next two years," says Fiotakis.

The Euro-Dollar exchange rate has been in decline since mid-April, a time when rates at 1.24 were being tested. The exchange rate has since recorded a low of 1.1510, a level that is being threatened at the time of writing:

EUR USD graphic

The downtrend is therefore not necessarily over, but the reckoning at UBS and other strategists is that the move could be nearing an end.

Indeed, we reported recently that analysts at Morgan Stanley reckon the EUR/USD below 1.16 now represents good value for speculators looking to bet on a Euro rebound.

Recently, the Euro sold off by close to 300 points against the Dollar, despite that the European Central Bank also announced a surprise end to its quantitative easing (QE) programme.

Morgan Stanley suggest there may be a silver lining in the recent moves for investors.

"The ECB is providing the market with the impetus for a steeper European Government Bond (EGB) yield curve, as net asset purchases ending coupled with a lower-for-longer path of front end rates should keep EGBs on a steepening trajectory. We believe the pace of the European economic recovery will only bolster this process further," says Hans Redeker, head of foreign exchange strategy at Morgan Stanley.

"A steeper curve supports a currency, explaining why we view EURUSD below 1.16 as attractive from a longer-term perspective," adds the analyst.

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