Interest Rate Differentials Deterimine Direction of the Euro and British Pound

Turning to the outlook what matters for the euro?  

Tuesday's PMI numbers and Wednesday's IFO figures from the Eurozone have been pretty much discarded by traders which tells us the focus remains on interest rate differentials between the US and the Eurozone.

"EUR/USD continues to track fluctuations in front end yield spreads fairly closely so recent ranges look likely to hold ahead of next week’s major US numbers, with risks slightly biased to the upside," say Lloyds Bank Research in a note to clients alluding to the importance of global interest rate movements.

Euro rate today: At the weekend the following rates are seen (Markets closed):

1. The euro to US dollar conversion: 0.00 pct lower than at yesterday's close - the exchange rate is at 1.2685.
2. The euro to pound sterling conversion: 0.00 pct higher on yesterday - the exchange rate is at 0.7807.
3. The euro to Australian dollar conversion rate: 0.00 pct lower - the exchange rate is at 1.4484.

Be aware: All forex quotes here are taken from the wholesale spot markets; your bank will levy a spread at their discretion. However, an independent FX specialist will undercut your bank's offer, delivering up to 5% more currency in some instances. Learn more. Also ensure your FX provider has the relevant buy orders set so when your rate is reached you do not miss out.

Outlook for the Eurozone Economy is Poor

The ultimate driver of the euro's valuation will of course be economic performance which in turn dictate interest rates which in turn drive currencies.

The sinking feeling in the eurozone will ensure European Central Bank (ECB) rates are kept lower, while outperformance in the UK and US will ensure rates head in the opposite direction.

This divergence will likely ensure Euro Dollar and Euro Sterling head lower.

"The EUR remains under pressure, helped by continuing negative comments on the prospects for the Eurozone economy and indications of potential for further unconventional easing being heard from Draghi. For the moment, Draghi will be satisfied with the market impact of his comments, which have led to a weaker EUR but also have been accompanied by a further decline in peripheral spreads, possibly anticipating more easing from the ECB," say Lloyds Bank Research in a note to clients.

Lloyds caution that there is a danger that the negative spin on the economy finishes up undermining confidence and leads to spread widening if the ECB are perceived as powerless. At that point, talking down Eurozone economic prospects is no longer a positive impetus for the economy.

Longer-Term, No Break for the Euro

"The USD is generally holding up better than yields, with end-2016 Eurodollar 3-month futures now moving close to levels seen before the last FOMC meeting," say BNP Paribas in a forex briefing to clients.

"The ongoing scepticism of the rates markets in the Fed’s ability to deliver tightening suggests there is plenty of room for a further USD rally if US data remains on track," say BNP Paribas.

The French bank has the euro dollar at 1.25 in their latest outlook note.

Euro to Pound Sterling Outlook: Pro-GBP

The outlook for the euro pound exchange rate is also negatively aligned at this stage.

Analysts at Morgan Stanley tell us losses are expected as we move towards the year end:

"For EURGBP, we believe that relative monetary policy will play a greater role, and here some further GBP relative gains are still possible and, as a result, we expect EURGBP to keep the pressure on the downside over the medium term.

"Initial rebounds to 0.7900 are selling opportunities, in our view, targeting 0.76/0.75 going into year-end."

Euro Under Fresh Pressure as Lending Figures Fall

We are witnessing a fresh slump in the EUR at the time of writing - Eurozone private sector lending fell 1.5 pct y/y in August - a long way from the 3 pct sustained rise economists say is required to stir inflation.

This tells us that the Eurozone remains dangerously close to a deflationary environment and currency markets are betting the ECB will announce fresh stimulus within coming months.

Any stimulatory action from central banks is invariably viewed as negative to the currency as it increases the supply of the said currency to the market.