Euro Forecast to Hit Parity With US Dollar in Late 2016 @ ABN Amro
- Written by: Gary Howes
New euro exchange rate forecasts issued by researchers at one of Europe's most prominent banks has confirmed the EURUSD should still reach a 1:1 exchange rate.
ABN Amro have announced downgrades to the US dollar confirming the EURUSD is likely to weaken at a slower pace than previously projected.
The downgrade to the US dollar’s outlook rests with forecast delays to the US Federal Reserve’s policy on interest rates.
However, there are still significant further declines ahead for the euro / dollar as parity is still pencilled into the ABN Amro currency outlook.
ABN Amro Analyst Georgette Boele (pictured above) has written to clients saying she expects the Fed to delay its first rate hike to 2016, given EM risks and softer macro data.
Uncertainty is high about the exact month of the initial interest rate rise, but ABN Amro believe that the first hike will not come until June 2016.
The bank expects a rate hike every other meeting after that, which would leave the target for the Fed funds rate in a range of 0.75-1.00% in December 2016.
“This will have a neutral to modest negative impact on the US dollar versus the euro in 2015. Therefore, we expect EUR/USD to trade within the range 1.10-1.15. If the US dollar were to come under pressure on the pricing out of Fed rate hikes then the ECB will likely expand its QE programme,” says Boele.
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This is because the ECB is currently assuming a EUR/USD rate of 1.10.
Further QE by the ECB will offset the impact of the Fed delay, keeping EUR/USD at around 1.12 this year.
A crucial variable to the dollar profile is investor sentiment, because this will determine if the net impact is negative or positive for the US dollar.
“For the remainder of this year, we expect investor sentiment to often change from positive to negative and vice versa. As a result, a clear direction in the US dollar will likely be missing,” says Boele.
The improvement of the US economy and positive investor sentiment will be positive for the US dollar versus the euro and the yen in 2016 in ABN Amro’s opinion.
“Therefore, we expect EUR/USD to trend lower to parity. In short, we have delayed our call for parity in EUR/USD by a year because of uncertainty surrounding the global economy and financial markets and the response of central banks (Fed, ECB),” says Boele.
UniCredit Downgrade Their EURUSD Call
With additional ECB stimulus in the pipeline, UniCredit have lowered our EUR-USD forecasts.
UniCredit now see EUR-USD at around 1.11 by end-2015 and at 1.16 by end-2016.
However, the eventual upward trajectory remains intact, as more easing should only offset some of the fundamental forces that remain supportive of the exchange rate.
For next week, one thing to watch is the changing correlations between EUR-USD and risk, which have been falling rapidly, suggesting that the negative relationship is fading.
In the UK, UniCredit expect some modest sterling appreciation, as pay growth will likely accelerate, although risks for some noisy price action in GBP have increased.