Euro Rate Today: Sell Euro / Pound Rallies Say Currency Strategists

Euro Exchange Rate: The EUR saw an impressive turn-around in fortunes over the past 24 hours with fresh doubt being cast as to whether the European Central Bank (ECB) will be able to deliver on its promise to flood the market with currency.

However, strength has since evaporated amidst US dollar gains on the back of a Republican victory for the US Senate.

The USD has carried the GBP higher in sympathy against the euro.

"The U.S. dollar rallied to a new four and a half-year trade-weighted high overnight after Republicans secured both the House and the Senate. A Republican majority Congress during a Democratic presidency, was last seen in 2006, and is generally seen as a pro-business, pro-economic growth political backdrop," says Omer Esiner of the rise in the USD and declines in the euro.

Euro rate today:

• The euro to pound sterling exchange rate (EUR/GBP) is 0.29 pct lower on a day-to-day basis having reached 0.7817.
• The euro to dollar exchange rate (EUR/USD) is 0.63 pct lower at 1.2467. The rate reached a high of 1.2548 following the ECB news.
• The euro to Aus dollar exchange rate (EUR/AUD) is 1.34 pct higher at 1.4551.

Ensure you get your ideal rate and don't get stymied by adverse market moves, find out how.

Be aware: The above quotes are taken from the global currency 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 currency provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.

What is Going on at the ECB?

Euro weakness must be contextualised against the impressive gains seen at the start of the week.

The ECB has promised to expand its balance sheet drastically in order to boost the stuttering Eurozone economy - by expanding the balance sheet we refer to the process of pumping more money into the markets in order to get the economy moving again. This is good for the economy but, broadly speaking, bad for the euro as its value declines with the increase in supply. 

However, the ability to expand its balance sheet was today thrown into question after bomb-shell revelations that the governing council at the ECB could be riven by in-fighting.

Ultimately, an inability to expand the money supply will mean the euro escapes devaluation. Traders have bought the shared currency as a result.

An exclusive report from Reuters today blew the euro higher.

Key points:

• Central bankers who decide ECB policy are angered by ECB President Mario Draghi's secretive management style and erratic communication
• Anger that Draghi 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
• Anger 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

All this adds for an exciting ECB meeting and press conference on Thursday.

The ECB May Disappoint Those Looking for a Lower Euro

The ECB surprised markets in September but its message was lost in translation in October.

The skepticism generated after the October meeting, together with weak August hard data and inflation expectations still well below pre-Jackson Hole levels, have created speculation on whether further moves are imminent.

"We still believe that data needs to get worse, particularly for inflation, for the ECB to develop a sense of urgency and ease policies further. Hence, we do not expect new measures at this week's meeting. Mario Draghi is likely to insist on the fact that the Governing Council is unanimously prepared to take unconventional measures, within the ECB's mandate, if it has to counter risks of a prolonged period of low inflation," says Segura-Cayuela.

However, communication challenges keep building up and, while he will try to address these, the last meeting taught us that it will not be easy.

Either way, there exists a real chance that markets are expecting a negative sounding Draghi - if this is not delivered the euro may run higher against the GBP, USD and other currencies.

Sell the Euro if it Rallies: EUR/USD Forecast at 1.20 End of 2015

However, any strength in the euro will surely be picked up on by speculators who will likely use it to reload their short positions.

Segura-Cayuela tells us that selling the euro against the pound sterling is particularly attractive:

"The short Euro market position poses some upside risks should the ECB disappoint, but a rally will offer an opportunity to sell, in our view. The CFTC data suggests that the short EUR/USD market position is almost as stretched as during the peak of the Eurozone crisis in mid-2012.

"Any indication that the ECB cannot reach an agreement on how to implement the latest measures and, even more so, what will follow if these measures fail to inflate the economy could squeeze the Euro higher.

However, we expect divergence of monetary policies to support a gradual weakening of the Euro and we project EUR/USD at 1.25 at the  end of 2014 and at 1.20 at the end of 2015.

"Moreover, a strengthening of the Euro will increase Eurozone deflation risks, increasing the probability of further ECB easing. Our strategy following the USD rally since May is to trade the Euro tactically given the short market position and to continue selling Euro rallies, against both the USD and the GBP."

ECB Will Act Next Year

So if there is little chance of euro-negative ECB action in 2014, just when can we expect changes to policy to be announced?

BofA advise that they expect the ECB to wait for the year to end and for its aggregate balance sheet to start increasing after the Dec TLTRO (11 Dec) and as asset purchases accelerate (the covered bond programme has started, while ABS purchases are about to begin in November).

However, markets remain skeptical on the potential for a large balance-sheet expansion and about the effectiveness of the latest ECB measures.

"Such skepticism could eventually put pressure on the ECB to ease policies further, but we do not believe that the pressure is strong enough yet," says Segura-Cayuela.

BofA reckon sovereign QE as unavoidable in our central scenario for the ECB:

"We believe that the existing package of ECB measures is unlikely to have a notable impact on the economy beyond weakening the Euro, in the absence of changes in the regulatory treatment of ABS mezzanine tranches or a guarantee programme. We therefore expect the economic recovery and inflation profile to continue surprising the ECB on the downside."

Swissquote: Reload Shorts on Euro Dollar Exchange Rate

Also expressing a negative view on the longer-term picture is Peter Rosenstreich at Swissquote Forex Services:

"Alongside the BoJ, the Riksbank and RBNZ also shifted towards a more dovish stance last week.

"This has increased the pressure on the ECB to act. Decelerating economic data, combined with uncertain stress tests, and national governments unwilling to act for the greater Eurozone good has only increase speculation of additional measures.

"The ECB has been working on additional measures to stimulate growth, primarily through pushing banks to provide credit to corporates and households. Yet so far actions have fallen short of results. Which has only increase the likelihood of outright QE.

"This week’s ECB meeting will be critical in providing insight  into the ECB thinking (via ECB Draghi accompanying press conference), but is widely expected to hold monetary policy unchanged. The ECB will still want to see the effect of additional measures before considering new actions. We see any rally in EURUSD (post-press conference) as an opportunity to reload on shorts."