Euro Dollar (EUR/USD): Forecast for Exchange Rate to Fall Towards 1.31 at Morgan Stanley

In a note to clients, as communicated via eFXnews, Morgan Stanley say they are recommending a short on the euro dollar rate.

For reference, at the time of writing the euro to dollar exchange rate (EUR/USD) is quoted 0.15 pct down on Monday night's close @ 1.3366.

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Morgan Stanley forecasting a lower euro and stronger dollar

The fundamental underpinning to the pro-USD case rests with the strong economic newsflow coming out of the US at present.

"US data have been strong across the board and now the missing piece for more hawkish Fed policy is higher wages. Wages have stayed at a muted 2% YoY level, which is too low for the Fed given its 2% inflation target. Markets will stay tuned, with inflation indicators staying particularly in focus," say Morgan Stanley.

A strengthening US economy has prompted financial markets to bring forward expectations of a US Federal Reserve interest rate hike.

As rate expectations rise so will the USD.

European Central Bank's neutral stance is a Euro negative

While US rate hike expectations come forward the same certainly cannot be said for the Eurozone where low inflation combines with sluggish growth to keept the ECB on the back-burner.

According to Morgan Stanley it is this observation that is pressuring the EUR side of the EUR/USD equation lower:

"The ECB has left is monetary policy assessment unchanged. Despite the ECB citing a small improvement in lending activity EURUSD ended lower at the end of the conference.

"Draghi suggested that interest rates are going to stay unchanged for an extended period of time, which is going to put the EUR under lasting selling pressure, in our view."

On the basis of these observations analysts say they are bearish on the euro dollar rate and see 1.35 as a level that would invalidate short trade.

They are forecasting the EUR/USD to achieve 1.31.

Also read our latest update from TD Securities where analysts are forecasting a US dollar rally into 2015.

Watch Russia - Geo-Poltics Are Key

Euro Will See Strength if Geo-Political Tensions Ease

The euro has come under pressure recently as tensions in Eastern Europe fester and sanctions are heaped on Russia.

However, when tensions in this theatre ease the euro benefits.

The Russian Defense Ministry announced that military drills near the Ukraine border are over, "catching many traders by surprise because earlier this week Russia banned food imports from the European Union and there were reports that troops were mobilizing near the Ukraine border raising concerns that Russia would attempt another intervention into Ukraine," notes Kathy Lien at BK Asset Management.

According to Lien it appears that the outlook has improved significantly to many investors.  The euro bounced off the 1.3350 level for the third time in a row.  

"Higher highs and higher lows point to a potential bottom but given the dovishness of the ECB, continued disappointments in Eurozone data and a recession in Italy, it is hard to be bullish euros," says Lien.