Euro Relief Rally on the Cards Say Lloyds Bank Research

The euro exchange rate complex (EUR) softened into the close of the previous week; however one researcher tells us that all is not lost for those hoping for a stronger shared currency in a daily forecast note.

The euro could have performed a great deal worse thus far in October - particularly with the increased scrutiny on the eurozone's economic performance.

"The spotlight is still on how the European Union (EU) will recover from their latest setback, with the EU’s powerhouse Germany, along with France and Italy suffering from recent poor data releases. With Interest rate hikes out of the question and the sign-off for their asset purchasing programme imminent, focus will be on how the Eurozone will recover in the final quarter of 2014 and moving into 2015," notes Charles Hasty at Smart Currency Business.

Indeed, on Tuesday the 21st of October we are seeing the euro rally:

• The euro to pound sterling exchange rate is 0.22 pct higher on a day-to-day basis. 1 EUR to GBP conversion = 0.7939.
• The pound to euro rate conversion = 1.2599.
• The euro to dollar exchange rate is 0.21 pct higher. 1 EUR to USD conversion = 1.2826.
• The euro to Australian dollar rate is 0.03 pct lower. 1 EUR to AUD conversion = 1.4570.

PS: All exchange rate quotes in this article are to be assumed as being taken from the wholesale currency markets. Your bank will subtract a spread at their own discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more FX. Learn more.

There has been no shortage of predictions warning of further and sustained euro weakness heading into the year-end and indeed into 2015.

However, we are also hearing a number of viewpoints suggesting near-term direction could actually favour the euro.

Lloyds Bank Research tell us that it is not all doom and gloom for the shared currency:

"It remains hard to be positive about the EUR given the fragility of the Eurozone economy and the consequent greater risks to the region from any loss in confidence.

"However, positioning remains short EUR and the loss of confidence elsewhere has moved yield spreads in the EUR’s favour for now, so if uncertainty about the FOMC undermines enthusiasm for the USD but supports risks appetite for now, the EUR should hold its own.

"Much of the current recent weakness in risk assets appears related to concerns about Eurozone growth which have been encouraged by the gloominess of commentary from the ECB.

"While the data has been disappointing, it isn’t at this stage indicating a return to recession, but a loss of confidence could trigger more severe weakness.

"The ECB priority may consequently now shift from emphasising weakness in order to pressurise governments to act and weaken the EUR to playing down weakness in order to protect confidence."

Such rhetoric could certainly play positive for the shared currency moving forward.

France Announces Progress

France continues to under-perform the likes of Germany and the United Kingdom; indeed it is the French under-performance that has been central to concerns about the Eurozone's outlook.

That said, signs of change are evident.

The French government announced yesterday a set of initiatives aimed at deregulation of the economy. This includes liberalisation of the transport sector, relaxing barriers to entry to some regulated professions, and allowing Sunday trading.

While we acknowledge that these are all steps in the right direction, in our view, they are still timid, and implementation will be key. Although the timing is not fully clear, the bill could be submitted early next year.

Will the European Central Bank Act

Bank of America Merrill Lynch warn that they see sovereign Quantitative Easing as unavoidable next year.

"In a central scenario of a weak economic recovery, where the fiscal stance does not ease meaningfully, and an inflation profile that surprises the ECB on the downside, we believe the central bank will be forced to do more than it has done so far, since current measures are unlikely to deliver much in the next six months, beyond the impact on the exchange rate," say BofA.

German Economy Presents a Worry

With France's economy under-performing it was only a matter of time before Germany joined suit.

German external demand has been dragged lower by France and Italy and additional weakness in emerging markets.

"This softer than we expected export trend in Germany (and to a minor extent, Spain) during H2, together with weak confidence on the back of geopolitical risks, will slow the evolution of investment in the next few quarters. With a lower growth profile in the later part of 2014, together with a weaker recovery of investment, we now expect the euro area to expand by only 1.1% on average in 2015 (from 1.3% before)," say BofA.