JP Morgan Raises Euro / Dollar Forecast in Wake of ECB
- Written by: Gary Howes
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Investment bank JP Morgan have revised their forecasts for the Euro higher in the wake of the European Central Bank's (ECB) February policy update.
"The ECB pivot warrants an upgraded euro outlook, but a modest one rather than a sea change as it has come amid a broader synchronized central bank move," says Meera Chandan, a strategist at JP Morgan in London.
The ECB on February 03 said inflation was now a concern for all members of the Governing Council and as a result they dropped guidance that they would not raise rates in February.
Euro exchange rates rallied on the development, responding to a repricing by markets of future interest rate expectations.
The market now expects the Deposit Rate to be at, or just above, 0% by year-end.
This implies up to five 10 basis point hikes by the time the year is out, an expectation which if met could support the Euro.
"A more aggressive ECB pivot warrants an upgraded euro outlook," says Chandan.
However, JP Morgan says it is too soon to reprice the Euro's outlook on a significant basis given the ECB's shift is occurring amid a broader synchronised central bank move.
Indeed, expectations for Bank of England and Federal Reserve rate hikes are significantly more aggressive.
"Rather than getting carried away with the immediate EUR-positive impact of ECB hikes at the back-end of the forecast period, we are instead stressing that cash rate differentials will continue to move in the USD’s favour as the Fed delivers four hikes, maybe five, before the ECB gets going," says Chandan.
Above: "Even with an ECB hike later this year, the euro’s (and yen’s) no-carry problem is still growing" - JP Morgan.
- EUR/USD reference rates at publication:
Spot: 1.1348 - High street bank rates (indicative band): 1.0950-1.1030
- Payment specialist rates (indicative band): 1.1270-1.1290
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JP Morgan raise the trough in their Euro-Dollar forecast to 1.12, seen in the second quarter, their one-year ahead forecast is set at 1.15.
Economists at ABN AMRO's investment and commercial banking arm have also acknowledged that recent developments at the ECB leaves their Euro forecasts looking too pessimistic and they have accordingly raised them.
ABN AMRO are amongst the most bearish on the Euro given their forecasts for the Eurozone's single currency are far below those of consensus.
Indeed, ahead of their latest upgrades they were expecting Euro-Dollar to extend towards parity by the end of 2023.
ABN AMRO says for 2022 financial markets expect four rate hikes by the ECB in steps of 10 basis points. But in contrast to market expectations, ABN AMRO expects one rate hike of 10 basis points by the ECB, and four rate hikes of 25 basis points by the Fed.
"We think that if our view proves to be correct then that the euro still weakens versus the US dollar this year and next year," says Georgette Boele, Senior FX Strategist at ABNA AMRO.
Their new EUR/USD forecast for end 2022 is 1.07 (up from 1.05) and for the end of 2023 they forecast 1.05, up from 1.0 perviously.
