Forex focus: euro has experts sitting on the fence

What are the chances of the euro reaching €1.42 again any time soon? We asked the experts

It was only a few weeks ago that sterling peaked at a seven-year high against the euro at €1.42. Since then the single currency has regained around six cents.

That might not sound much, but if you were planning on spending £100,000 you’d be €6,000 worse off and if you received £1,000 a month you’d have €60 less to spend.

So what are the chances of the euro reaching €1.42 again any time soon? A straw poll among currency specialists showed opinion was divided.

Among those in the positive camp, is Charles Murray of FC Exchange ( fcexchange.co.uk ), who said: “In the short-term 1.40-plus is still a strong possibility, as Greece is dangerously close to running out of money 20 April touted as a likely date for this to happen.”

Alistair Cotton from Currencies Direct ( currenciesdirect.com ) also expects the rate “to move back towards 1.40 over the coming months”.

Caxton FX’s ( caxtonfx.com ) Nicholas Ebisch is even more upbeat: “There is scope for the rate to return to its peak of 1.4250 soon. The predictions for the euro over the next three months are that there will be steady euro weakness.”

Trevor Charsley at AFEX ( afex.com ) agreed, saying: “On the premise that we get a similar government to the incumbents we do see GBP/EUR testing 1.4250 after the election. The next target after this is 1.4500.”

Angus Campbell from FxPro ( fxpro.co.uk ) doesn’t believe there is much that can help the euro, saying, “It is hard to see the euro regaining too much of the ground it lost in the first quarter of the year despite its recent best efforts to do so.”

On the other side of the euro fence, among the pessimists is Chris Towner of HiFX ( hifx.co.uk ). He said: “We would expect the euro to strengthen back again towards €1.30 in the months ahead.”

Josh Ferry Woodard is also in this camp, saying, “As long as Greek officials manage to keep the Hellenic nation inside the eurozone then we could see GBP/EUR weaken towards 1.32-1.34 over the next three months.”

Those sitting on the fence include Chris Saint of Hargreaves Lansdown (LSE: HL.L – news) ( hl.co.uk ) is reluctant to commit while the UK fights its closest general election in decades. He said: “Sterling’s 10pc rise since the start of 2015 to highs of €1.4250 looked to be a little too far too fast and I don’t see it reaching these heights again before we know the outcome of the election. However, the euro’s longer-term weakening trend looks to be intact and I suspect sterling could re-test these highs later in the year, particularly if ‘Grexit’ fears linger as UK political risks fade.”

Charles Purdy of Smart Currency Exchange ( smartcurrencyexchange.com ) is also hedging his bets: “The euro is unlikely to show major strengthening in the short term but also unlikely to see further significant weakness, especially as other countries such as the UK and the US will be very reluctant to see their exporters unduly penalised.”

The huge question mark hovering over the direction of the pound is the UK election in May.

David Kerns of moneycorp ( moneycorp.com ) said: “The GBP/EUR rate appears to have peaked in the short term at €1.42 as sterling itself has come under selling pressure following some disappointing economic data releases at home.

“As the general election looms ever closer that too can have a detrimental impact on the pound as investors shy away from the UK until the leader of the next parliament is known.”

A hung parliament of some form or another looks likely at the moment and none of the outcomes is completely positive. A slim Tory win, while generally encouraging for the pound, has the drawback that David Cameron’s promised referendum on the EU will depress sterling.

However, the biggest threat to the eurozone is the risk that the Greek debt crisis will mean it exits the currency bloc. As negotiations between the Greek government and its creditors heat up and deadlines get nearer, starting this week, the euro is likely to start wobbling.

“The main danger from a ‘Grexit’ is that it sets precedence for departure from the euro,” said Charsley. “Something that Mario Draghi the ECB governor has said is irreversible. If he is proven to be wrong, this could be the beginning of the end for the euro.”

And that’s not all. The eurozone is still struggling with too many out of work, particularly in the southern states, low or no inflation and quantitative easing, which all combine to keep downward pressure on the currency.

But, from a self-interested point of view, a continuing weak euro is going to be welcomed by businesses and expats getting funds in pounds.

Euro: Watch Out Below, Says Deutsche Bank

The decline and fall of the euro’s exchange rate against the dollar is moving at an eyebrow-raising rate.

It’s at $ 1.0750… no, $ 1.0725… no, just under $ 1.07. You get the idea.

Predicting a decline to one-to-one for the exchange rate is becoming an increasingly popular sport.

Deutsche Bank, whose thoughts are worth a mention since it’s the second biggest bank in FX trading, has been in the bearish camp for a while. Now it’s even deeper in bear territory, predicting the rate will drop to $ 0.85 two years from now.

The bank revised lower its forecasts on the euro against the dollar Tuesday, taking the view that European investors will shift their assets towards foreign markets, and in particular the U.S., the U.K. and Canada.

Strategists George Saravelos and Robin Winkler expect the euro to fall towards parity by the end of 2015 from a previous forecast of  1.05. From there, the euro will keep plummeting to 0.90 by 2016 and 0.85 in 2017.

That’s one of the most bearish calls so far on the euro.

Pushed down by the combined effect of the ECB bond-buying program and the prospect of an interest rate rise in the U.S., the euro has lost about 12% since the start of the year agains the dollar. That’s a big move for a major currency. It’s worth pointing out that it’s lost less against a trade-weighted basket of other currencies, which you can read all about here.

For Deutsche Bank, capital flows are key. Local investors will grow tired of the tiny returns available in the region’s pricey bond market, and look elsewhere, the bank reckons.

Capital outflows will be of about €4 trillion ($ 4.3 billion).  Assuming net financial outflows of €150 billion a quarter, this process will take the rest of the decade, it says. “The primary destination of European outflows will be core fixed income markets in the rest of the world, and evidence over the last few months supports these trends,” they say.

Foreign buyers of European bonds are not expected to make up the gap.

“We are seeing large outflows from European fixed income,” said Adrian Owens, a currency funds manager at GAM last week. “Why buy Bunds at 35 basis points? Why buy euro debt from Coca-Cola at these yields? Central bank reserve managers are also moving out of the euro.”

Euro zone business growth picks up

Growth in euro zone business activity hit a seven-month high in February, following a pick-up in demand, according to a closely-watched survey released on Friday.

The flash composite reading of Markit’s purchasing managers’ index (PMI) came in at 53.5 this month, up from January’s 52.6 and above analyst forecasts. The composite measure includes activity in both the manufacturing and services sectors; a reading over 50 marks expansion, whereas one below indicates contraction.

“Growth of business activity has now accelerated for three successive months, having almost stalled back in November, driven higher by stronger demand,” Markit said in its release. “New orders also grew at the sharpest rate for seven months in February.”

The services sector drove February’s growth in business activity, with manufacturing expansion remaining relatively subdued.

The region-wide figure got a boost from two of the currency bloc’s biggest economies.

Germany’s composite reading ticked up in February, to 54.3 points from 53.5 points in January.

The reading for France, where economic growth has lagged that of its euro zone neighbors in recent months, also came in better than expected. Its composite PMI rose to 52.2 – the highest reading in three and a half years, and up from 49.3 in January.

Howard Archer, chief European economist at IHS Global Insight, described the figures as “genuinely encouraging.”

“There are mounting signs that euro zone economic activity really is now improving, which reinforces our frequently stated belief that growth will surprise on the upside in 2015,” he wrote in a note.

In the fourth quarter of 2014, economic growth in the region beat expectations but remained anemic, with the economy expanding by 0.3 percent.

Chris Williamson, chief economist at Markit, said the European Central Bank’s bond-buying program – which he described as a “bazooka” – had directly boosted business optimism in the region.

The European Central Bank’s (ECB) Governing Council announced the launch of a controversial government-bond-buying program , a policy known as quantitative easing, at its January meeting. One of the main aims of the scheme is to drag the euro zone out of growth-sapping deflation and back towards the ECB’s “just under 2 percent” target. Prices in the region fell by 0.6 percent year-on-year in January, after sliding into deflation for the time since 2009 in December.

However, separate figures published Friday revealed that German producer prices fell further in January, leading to increased fears that the region is heading towards a deflationary spiral.

– By CNBC’s Katrina Bishop

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Euro zone starts 2015 better than thought as firms slash prices – PMIs

By Jonathan Cable

LONDON (Reuters) – The euro zone economy began 2015 in better shape than expected but firms were forced to slash prices, surveys showed on Friday, a day after the European Central Bank announced a money-printing plan in a bid to revive inflation.

Firms across the continent have been cutting prices at the fastest rate in nearly five years this month, in a trend that backs up the ECB’s decision on Thursday to embark on a programme of quantitative easing.

Markit’s Eurozone Composite Flash Purchasing Managers’ Index, based on surveys of thousands of companies and seen as a good growth indicator, bounced to a five-month high of 52.2 from December’s 51.4.

That beat the forecast in a Reuters poll for a more modest rise to 51.8 and marked its 19th month above the 50 level that separates growth from contraction.

“We are moving away from the lows towards the end of last year, but the actual rate of growth being signalled is still moderate,” said Rob Dobson, senior economist at survey compiler Markit.

Dobson said the PMIs pointed to first-quarter growth of 0.2 percent, slightly worse than the 0.3 percent predicted in a Reuters poll last week.

But the index for prices charged slumped to 46.9, its lowest since February 2010, and comes after official data showed consumer prices fell 0.2 percent in December, the first negative print since the depths of the financial crisis in 2009.

That discounting helped drive the services PMI up to 52.3 from 51.6, beating forecasts for 52.0, while the factory PMI rose as expected to 51.0 from 50.6.

The PMI for Germany’s private sector was less than a point above November’s 17-month low and the downturn deepened in France, the bloc’s second-biggest economy.

Also casting a shadow over February’s outlook, demand for manufactured goods barely increased while service firms were only able to build up the smallest of order backlogs.

“I wouldn’t expect there to be a significant improvement in February. We might see growth continue to improve slowly but we are unlikely to see a significant upturn,” Dobson said.

(Editing by Hugh Lawson)

Dollar dominance to push currency towards parity with euro

ABM Amro has also forecast euro-dollar parity in 2016, while Barclays believes the euro will weaken to $ 1.07 by the end of 2015.

Low inflation in the UK has pushed back market expectations of an interest rate rise to 2016, although eventual rises are expected to push the pound up to €1.37 against the euro, from €1.27 today.

Mr Bishop said Britain’s borrowing bill remained a concern. “We see some headwinds building. We worry about increased political risks and persistent large twin fiscal/current account deficits,” he said.

“Until these issues are cleared up the dollar side of the debate will dominate.”

The Euro’s performance in Q4’14 captured perfectly the essence of our Q4 forecast title: “deflation pressure stack up against ECB, Euro in Q4.” On the inflation front, the situation could not have gone worse: the ECB’s preferred market measure of inflation, the 5Y5Y forward breakeven rate, closed the first week of December at 1.608%, below the ECB’s medium-term inflation target of 2%. Before the ECB’s last meeting of 2014 on December 4, the 5Y5Y swap fell to as low as 1.429% – perhaps the most significant piece of evidence suggesting that a Japanese-like ‘lost decade’ has descended upon the Euro-Zone.

The economic backdrop entering Q1’15 remains the biggest impediment to the Euro as evidence of a protracted economic slowdown and plummeting inflation expectations have cropped up. Based on what we’ve heard from various ECB officials, the weak state of economic affairs (combined with zero thrust among fiscal policymakers to do anything constructive) could necessitate the next iteration of ECB easing as soon as Q1’15.

This time is different, however: while market participants call for a Fed-styled, sovereign QE program, the ECB recognizes it would be ineffective given the fact that peripheral yields have plummeted across the region. Instead, focus should be on the size of ECB’s balance sheet.

The most significant development that will happen in Q1’15 is that the ECB will decide whether or not that the current easing measures (interest rate corridor in negative territory, TLTROs, ABS-program) are sufficient enough to drive the balance sheet back towards its early-2012 levels (oft-cited by ECB President Mario Draghi and ECB VP Vitor Constancio). The end goal for the ECB is to increase excess liquidity levels in the region, in the hopes that banks’ buffered balance sheets will allow them to increase lending activity.

To this end, our focus for Q1’15 is if the ECB will act once more to accelerate its balance sheet’s climb back to those early-2012 levels – which, as it stands, would result in another €500 billion to €1 trillion in asset purchases. Sovereign QE is merely one of the routes that could possibly be traveled to achieve this goal; but it is not necessary. The prospect of a QE program – not just sovereign but anything that boosts the size of the ECB’s balance sheet – should be sufficient enough to keep the Euro pinned lower over the coming months.

EUR/USD Cycles Point Lower in Coming Months

The 4th quarter saw more weakness in EUR/USD as the exchange rate fell to its lowest level in over two years. The break of key long-term retracement levels at 1.2800 and 1.2450 (61.8% and 78.6% of 2012 – 2014 advance) was quite significant technically and serves as further confirmation that an important decline is underway in the euro. General weakness in the rate is favored through the 1st half of 2015.

The 50% retracement of the all-time low and all-time high near 1.2100 should prove to be an important pivot in 1Q15 with weakness below needed to maintain downside momentum and set the stage for a deeper decline towards 1.1800 and possibly 1.1200 in 2015. Resistance at 1.3150 is now critical and only a move over this level would turn attention higher in the single currency.

Our cyclical analysis indicates that late January and late February should prove important for the exchange rate from a timing perspective.

Ballooning ECB Balance Sheet to Sink Euro in Q1’15

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Written by Kristian Kerr and Christopher Vecchio, Currency Strategists for DailyFX.com

Euro Under Fire as ECB Preps for Massive Balance Sheet Expansion

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Euro Under Fire as ECB Preps for Massive Balance Sheet Expansion

Fundamental Forecast for Euro:Neutral

EURUSD technicals turned more bearish after the ECB meeting, the US NFP release on Friday.

December forex seasonality has favored a weaker EURUSD in the QE era.

Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

The European Central Bank’s dovish tone at its final policy meeting of the year has paved way for speculation anew on forthcoming easing measures, sinking EURUSD to fresh yearly lows. The 18-member currency slipped by -1.36% against the US Dollar, closing the week at $ 1.2283, but not before dipping as low as $ 1.2271 in the process. The ECB didn’t need to employ a sovereign QE program like some were expecting in order to keep pressure on the Euro. Instead, as we discussed last week, the ECB is signaling it has other intentions.

The stated goal of ECB policy is to ensure price stability, but under the pretense of its current measures (interest rate corridor in negative territory, TLTROs, ABS-program), it is failing miserably in its attempts to lift inflation. The 5Y5Y inflation swaps, ECB President Draghi’s purported favorite market-measure of inflation, rebounded to 1.608% on Friday, after hitting as low as 1.429% on December 1. The ECB’s stated medium-term inflation target is ‘at or near +2%.’

We’ve heard several times over the past few weeks that prominent ECB officials, including President Mario Draghi and Vice President Vitor Constancio, believe that expanding the ECB’s balance sheet back to its early-2012 levels will help revive the region’s plummeting inflation expectations and flagging credit growth.

Acknowledging that the ECB has fallen short of its target, one might consider why this meeting lacked action. While market participants called for a Fed-styled, sovereign QE program, the ECB recognized it would be ineffective given the fact that peripheral yields have plummeted across the region. The ECB may have offered tacit acknowledgement that the central bank is moving closer to a QE program, but that doesn’t mean it has to be a sovereign QE program. A sovereign QE program would be just one possible route to achieve the desired end goal of lifting the balance sheet back towards its early-2012 levels.

What was at risk at the past meeting was the ECB’s credibility. With the second TLTRO allotment results due to be revealed on December 11, any new QE program ahead of the release – which wouldn’t have had support of a unanimous Governing Council – would: a) be equivalent to admitting the previous measures aren’t working; and b) have reset the clock on the ability to act in the future. By waiting until at least January, the ECB’s doves can avoid scuttling future ambitions as hawks demand additional time to let the measures work their way through the Euro-Zone.

If the current measures, the TLTROs and ABS-program, fail to begin lifting the ECB’s balance sheet back towards its early-2012 levels, (roughly €500B to €1 trillion greater than where it current stands), the ECB will assess whether or not it needs to engage in more aggressive easing policies in order to stoke growth and inflation as soon as the January 22 meeting.The last time a €1 trillion expansion happened, in the form of the LTROs in December 2011 and February 2012, the Euro suffered immensely against its major counterparts. This time, it’s not different. –CV

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Zloty hits 4-month high, Polish cbank seen keeping rates flat

imageBUCHAREST: The Polish zloty hit a fresh four-month high against the euro, lifted by expectations that the central bank will decide not to cut interest rates later on Wednesday, while other currencies in central Europe were mostly flat.

Poland’s central bank had said only a deteriorating growth outlook for the region’s biggest economy would prompt further monetary easing, signalling it would look beyond falling consumer prices.

Poland’s benchmark interest rate now stands at 2.00 percent, compared with the euro zone’s 0.05 percent. Analysts polled last week expected Poland to keep rates unchanged throughout 2015.

“The National Bank of Poland has signalled this outcome well in advance, hence (the decision) is likely to prove market-neutral, with a slight bias towards a stronger zloty (if rates are left unchanged) as there are likely to be at least some rate cut bets among market participants in the present ECB environment,” Commerzbank said.

By 0910 GMT, the zloty traded at 4.156 to the euro and the forint at 306.69 per euro, both up 0.3 percent on the day. The Romanian leu, the Czech crown and the Serbian dinar were flat.

Hungarian players are closely watching Poland’s rate

decision, which should preserve the Polish yield advantage over the euro zone, as it might affect Hungarian rate expectations.

“The Polish rate meeting is in focus today.

There is a small chance of a rate cut but I think a shift towards a more dovish rhetoric is possible, also in light of the concerns over Russia,” said a Budapest-based trader, referring to the impact on Poland of sanctions imposed on Russia in the Ukraine crisis.

Official data showed Hungary’s and Romania’s economies expanded by 3.2 percent on the year in the third quarter, confirming preliminary released data.

Copyright Reuters, 2014

FOREX-Euro up on short-covering rally post-ECB, U.S. payrolls next

* Euro back near $ 1.2400, off two-year lows around $ 1.2279

* More dovish words but no action from ECB

* U.S. nonfarm payrolls next major event risk

By Ian Chua

SYDNEY, Dec 5 (Reuters) – The euro started trade on Friday higher against most of its peers but could struggle to extend gains if U.S. employment data due later in the day re-energise dollar bulls.

Investors were forced to trim bearish positions in the common currency overnight after the European Central Bank (ECB) disappointed some by not immediately expanding its stimulus program.

As a result, the euro jumped to $ 1.2457 from a two-year trough around $ 1.2279. It has since steadied at $ 1.2380.

It climbed towards a six-year peak of 149.12 yen set on Nov. 20, rising as far as 148.95 before losing a bit of steam to last fetch 148.27 yen.

The short-covering rally in the euro knocked the dollar index to 88.633 from a 5-1/2 year high of 89.122. Against the yen, the greenback popped above 120.00 for the first time in over seven years, but has since drifted back below the big figure.

If there was one reason tempering a more aggressive squeeze in short euro positions, it would have been ECB President Mario Draghi’s promise to decide early next year whether to take further action to revive the euro zone economy.

Importantly, Draghi also signalled that he would not allow opposition from Germany or anyone else to stop it.

“Taking on board likely further falls in headline HICP, Draghi’s comments give succour to the idea that further policy moves are coming at the next couple of meetings,” said Gavin Friend, senior markets strategist at National Australia Bank.

“We think these are likely to include corporate bond and sovereign QE and possible adjustments to the ‘intended’ size of balance sheet expansion – QE that will in time unseat the euro further.”

For now though, all eyes will be on U.S. payrolls due at 1330 GMT. Analysts polled by Reuters expect employers added 230,000 new jobs to their payrolls last month and for the unemployment rate to remain unchanged at 5.8 percent.

Any upside surprise will further highlight the diverging outlook between the United States and Europe, giving the market a fresh excuse to buy the dollar against the euro.

Another standout performer overnight was the Australian dollar, which continued to drift lower in the wake of this week’s disappointing local economic data.

The slowdown in growth has prompted a string of analysts from Deutsche to Westpac to call for interest rate cuts next year. As a result, the Aussie slid to a fresh four-year trough of $ 0.8356 and was on track to end lower for a third straight week.

(Editing by Dan Grebler)

Euro falls ahead of ECB meeting

(menafn – ecpulse)

The euro fell against the U.S. dollar on Tuesday as investors anticipate the European Central Bank (ECB)’s interest rate decision next Thursday.

Expectations that the ECB will move towards pumping more liquidity in the markets are growing, after releasing the preliminary expectations for the annual CPI of the euro area, in addition to the recent statements by ECB’s president Mario Draghi.

The EUR/USD pair fell by 0.24% at 09:11 GMT, consolidating at 1.2443.

The recent pledge of Mario Draghi that the bank may expend the asset purchase program (quantitative easing) at its meeting scheduled on Thursday increased weighed on the euro. This comes after releasing the preliminary reading of the annual CPI of the euro area, which showed a decline from 0.4% to 0.3%.

The euro will remain under negative pressure until releasing the interest rate decision on Thursday, which will push it further to the downside if the bank decided to expand the quantitative easing program on the short and medium term.