Euro Rate Today: Why is the euro lower, and how far will it fall?

A look at the currency markets in early afternoon in London shows:

• The euro dollar exchange rate is half a percent in the red at 1.3519.
• The euro pound exchange rate is 0.02 pct lower at 0.8469.
• The euro Australian dollar exchange rate is 0.74 pct lower at 1.4257.

(Please note: All quotes here taken from the wholesale markets; your bank will subtract a discretionary spread when passing on their rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.)

Why is the euro lower?

Eurozone CPI estimate for October came in much weaker than expected; this prompted front end EUR rates to fall and EUR/USD moved lower in line with relative rate spreads.

Also sending euro exchange rates lower was news that inflationary pressures have eased over the past few months.

"While Draghi had indicated annual inflation rates would be at low levels for some months, but a print of 0.7% y/y is perhaps lower than the ECB had anticipated," say analysts at Lloyds Bank Research.

According to Lloyds, while EUR/USD has come off the recent highs, EUR trade weighted index made new year highs earlier this month and has continued to edge higher.

"So given the strength of the currency and the continued weakness in inflation, this will likely put pressure on the ECB to act," says a note from Lloyds.

How far will the euro fall?

Traders are now selling the euro on the assumption that the ECB will act in some way to gaurantee the eurozone recovery remains on track. With inflation lower they have more room to acts - either by cutting interest rates or expanding their balance sheet by upping the LTRO operation.

However, in reality, there is perhaps limited scope for what the ECB can do; Nowonty recently commented that the ECB were unlikely to cut the benchmark rate.

Another LTRO is quite possible, Draghi indicated that it is an instrument they were prepared to use if needed and the ECB has showed some concerns about the upcoming liquidity cliff.

"We think the market will be cautious ahead of next week’s ECB press conference, which will likely put pressure on EUR and see it underperform," say Lloyds.

Indications are that long euro positions became stretched during October, which in turn triggered an overshooting in EUR/USD; the currency must correct lower now.

Kasper Kirkegaard at Danske Bank says he is predicting further losses:  

"This (overperformance) is now being traded away and given the large move in relative rates (2-year EUR-USD swap spread has narrowed 8bp) the euro sell-off has potential to run further in the short term."

"Sentiment it is a-changin’. Not least on the currency market! In less than one week the market has gone from being fairly bullish on the euro for the short term to unwinding long positions from stretched levels (at least that is what the spot reaction indicates).