The euro rate today: EUR fights back pushing GBP and USD lower

Euro exchange rates today: The euro has had a poor week so far with signs that the currency is being used as a funding agent. However, Friday afternoon suggests momentum could be shifting.

A look at the euro exchange rate complex shows that the EUR is starting to enjoy some support:

• The euro dollar exchange rate is 0.13 pct higher at 1.2759.
• The euro pound exchange rate is 0.02 pct lower at 0.8274.
• The euro Australian dollar exchange rate is 0.27 pct higher at 1.4880.

Lloyds Bank Research have told us today that they believe the EUR has been the main funding agent as the 'carry trade' makes a return to favour.

The carry trade refers to the mechanism by which investors seek to profit from the difference in interest rate yields being offered in different countries.

Below: The EUR-USD's recent price action:

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An example would be the scenario where investors borrow cheap euros and buy Australian bonds - the yield on those bonds exceed the cost of borrowing the EUR. Thus, the AUD is bid higher in relation to the EUR as the transaction is carried out.

Friday afternoon is seeing a change in fortunes in the global currency markets as this dynamic reverses somewhat. However, we would not call an end to the move just yet.

The euro dollar exchange rate has meanwhile moved lower as the broader EUR complex subsides.

But, Lloyds Bank warn:

"USD gains against the EUR from here are likely to be tougher to achieve, with technical support in the 1.3720 region and the possibility of some position squaring ahead of the weekend," says a note from Lloyds Bank Research."

Outlook for the euro next week

Turning to next week we will be looking for evidence of the aforementioned carry trade.

However, there are domestic issues to keep an eye on.

UniCredit Bank tell us the ECB meeting will be next week’s top event:

"We expect policy settings to remain unchanged, as the slowdown in March CPI (out next Monday) is likely to be largely driven by temporary factors. The most important issue will be if and how the ECB will decide to become more vocal about the currency," says a note from UniCredit Bank."

UniCredit think Mario Draghi will adopt a "soft" strategy here, dealing with the exchange rate only in the Q&A session and stressing that the ECB stands ready to act if currency appreciation were to endanger price stability.

Data could also weigh on the euro

Back to today and we must not neglect to mention domestic data has for the most part been unsupportive of the EUR.

Weak Eurozone inflation data—German states providing the lead into the preliminary national report and the Spanish CPI dipping back into negative territory for the Y/Y measure—has added to the pressure on the EUR into the end of the week.  

"Soft data will boost speculation of additional ECB measures, possibly as soon as next week’s policy meeting.  We doubt the ECB is ready to act just yet but weak inflation trends will underscore the central bank’s sensitivity to the EUR’s level for investors and load some further negative weight to the currency," says Shaun Osborne at TD Securities.

Additional headwinds for the EUR will come from even marginally better US data reports in the coming week as investors mull US policy prospects.  

An additional potential negative is the ongoing focus on the Russian military deployment near Ukraine and concerns that further incursions may be seen.  

"We rather think ECB President Draghi’s recent comments on the “increasing relevance” of the exchange rate for the policy outlook have served to put a firm cap on EURUSD around 1.40.  EURUSD losses should accelerate below 1.3650/70.  We are short EURAUD and look for a drop in the cross to 1.42," says Osborne.