Forecasts Warn EUR/GBP and EUR/USD Will Ultimately Decline

Euro, Pound and Dollar Today: Expect further declines in the EUR/USD exchange rate pair say analysts at Barclays who continue to expect the European Central Bank to announce sovereign quantitative easing by Q1 2015.

The call comes at a time the euro is rallying higher on a report that suggests members of the governing council at the ECB are unhappy with the governing style of President Mario Draghi.

Nevertheless, we hear from analysts at Barclays on why rallies such as those being witnessed at present represent fresh euro-selling opportunities.

First; today's exchange rates (18th November).

• The euro to pound sterling exchange rate conversion: EUR/GBP is 0.99 pct lower on a day-on-day comparison at 0.7846. A strong performance has been seen by sterling as a number of economic data releases come together and lay out the prospect for a Bank of England rate hike. 
• The euro dollar exchange rate conversion: EUR/USD is 0.51 pct lower at 1.2278

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P.S: The above quotes are taken from the global FX spot market. It must be noted that your bank will widen the spread on the above numbers when passing on their retail rate to customers. An independent FX provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.

ECB Discontent With Draghi

Eurozone central bankers, who set policy at the ECB, plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources told Reuters.

The report says Draghi effectively set a target for increasing the ECB's balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public.

Irritation among national governors who hold a majority on the 24-member council could limit Draghi's space for bolder policy action in the coming months.

This realisation has currency markets questioning previous expectations and selling the euro as a result.

Barclays: Forecasting Further Declines for the Euro Dollar Exchange Rate

We have an important week ahead of us for the euro exchange rate complex with the ECB meeting to decide on what steps to introduce to boost the Eurozone economy.

While the 'nuclear option' of  sovereign bond buying (QE) is not expected to be announced in November markets will remain wary that it will eventually be unleashed.

Any hints at the aggressive expansion of money supply will ultimately be negative for the euro, that said, if nothing new is announced then the euro could well rally higher in relief.

While the ECB is expected to hold the current monetary policy stance unchanged this week, euro area flash CPI shows persistent downside risk to the inflation profile in euro area.

As such, forex analysts at Barclays continue to expect them to announce EGB QE by Q1 2015.

In a note to clients, analysts say:

"We prefer to fade post-meeting/press conference rallies, if any. We have a mixed forecast for the US employment report relative to the consensus, but the outcome is unlikely to prevent it from declining further.

"Technical analysis also supports our medium-term EURUSD bearish view. A combination of near-term topping signals on the EURUSD daily plot point to resumption of the greater downtrend. We are bearish and prefer to fade any upticks against the range highs near 1.2890.

"A move below the 1.2500 area would confirm the overall move lower and downside traction towards initial targets near 1.2460. Beyond there, we expect a move towards 1.2100 and then 1.2040, the 2012 range lows."

The Euro Exchange Rate Complex to be Driven by ECB Decision

What should we expect from the all-important ECB rate decision due on Thursday?

Commenting ahead of the event, Barclays say:

"In the euro area, the ECB’s meeting followed by President Draghi’s press conference will dominate the agenda this week.

"Both we and the consensus expect no change in policy, with the ECB likely assessing the effect of already announced measures before considering whether additional action is needed. Despite a mild uptick in euro area inflation last week (up to 0.4% y/y from multi-year lows), medium-term inflation expectations remain subdued.

"We continue to think the ECB will have to do more in order to re-invigorate inflation and expect it to commence with EGB purchases as soon as Q1 2015. As a result, we continue to expect significant EUR weakness over the medium term and recommend staying short EURUSD into next week’s meeting."
 
In terms of data, market attention is likely to be drawn to euro area September retail sales (consensus: -0.8% m/m), German factory orders (Thursday; Barclays: 2.5%; consensus: 2.2% m/m) and German industrial production (Friday; Barclays: 2.0%; consensus: 2.0% m/m).

We will also get the final PMI readings for Germany and the euro area (Monday, Wednesday).

US Economic Data: What Data Matters for the USD?

There is another busy week ahead in US data with the October US employment report (Friday) the focus.

Initial jobless claims suggest labour market conditions have continued to improve at modest pace lately; Barclays expect another solid outcome with headline NFP of 225K and the unemployment rate declining one-tenth to 5.8% (consensus: 234K and 5.9%).

Wage growth, especially the headline data, is yet to pick up materially, but analysts expect it to increase gradually over time following the decline in unemployment rate.

For this month, Barclays expect average weekly earnings of 0.2% m/m and average weekly hours of 34.6 in line with consensus.

Other key data to watch includes ISM manufacturing (Monday; Barclays: 56.0, consensus: 56.2), ADP (Wednesday; consensus: 220K) and ISM non-manufacturing (Wednesday; Barclays: 58.0, consensus: 58.0).

Overall, Barc's forecast is broadly in line with consensus and likely to have limited directional implications to the USD.