EUR/USD Forecast At 1.12 in 2015 by Morgan Stanley
The euro dollar exchange rate (EUR/USD) is forecast to fall significantly in 2015.
As the EUR/USD slips towards the 1.10 level following the announcement of sovereign QE at the ECB we hear from one bank as to why they are predicting even further declines.
Indeed, so confident are Morgan Stanley in their long-term prediction that selling the euro dollar has been labelled the 'top trade' for 2015.
Before we hear their rationale for the call, here are the rates at the time of this articles most recent update:
- The euro to dollar exchange rate is at 1.1481.
- The euro to pound exchange rate (EUR/GBP) is meanwhile 0.06 pct up at 0.7586.
The above market rates are not available for international payments as your bank will shift the rate in their favour. However, an independent FX specialist will undercut your bank's offer, thereby delivering as much as 5% more currency in some instances. Find out how.
2015 Will be Tough for the Euro
Morgan Stanley give the following reasons for their bearish approach to the EUR/USD in 2015:
- EUR remains at risk from global deflationary pressure, given the relative openness of the eurozone economy and high debt levels.
- The eurozone growth outlook is also set to remain subdued, keeping market expectations for further ECB action heightened.
- However, we believe that the ECB policy measures taken already will be enough to keep EUR under pressure over the coming year.
- Portfolio outflows and EUR being used as a funding currency are consistent with a longer-term structural decline.
"We favour selling EURUSD, targeting 1.12 for end-2015," says a note issued by Morgan Stanley, "risks to our bearish EUR view could come from central banks globally expanding their currency reserves, leading to renewed allocation into EUR".
The ECB Sends the Euro Exchange Rate Lower
Most analysts are positioned agressively against the euro exchange rate complex at the current time. However, it would appear that their negative forecasts may have been too cautious.
The reason for this being the agressive easing action announced at the European Central Bank (ECB) in January.
"The European Central Bank (ECB) announced that it is adopting a quantitative easing (QE) programme. The ECB will commit to purchasing €60bn worth of public and private assets monthly. It is hoped that the move will help to boost inflation levels close to the ECB’s 2% target. The programme is expected to finish at the end of September 2016," says Carl Hasty at Smart Currency Business.
"Overall, the programme is probably more aggressive than expected owing to a) the partial risk-sharing and b) the potential open-endedness of the program," say Goldman Sachs.
We await the latest currency forecast updates in response to the action at the ECB.
Why the Euro is Under Long-Term Pressure
For those looking to understand why the euro is falling, Dr Dennis Novy, an associate professor of Economics at the University of Warwick, gives his explanation:
“The Eurozone economy has been in the doldrums for years now.
"The big problem is that hard-hit countries like Greece, Portugal and Spain cannot do what such economies would normally do - depreciate their currencies to stimulate the economy. The reason is of course that they are part of the single Euro currency and thus tied in with other countries such as Germany that are performing reasonably well.
“Another complication is that inflation has been sliding further and further away from the European Central Bank's 2 percent target. Inflation is nearing 0 percent. This brings the Eurozone close to deflationary territory, and the recent drop in oil prices isn't helping. Once consumer prices start falling, people and businesses tend to delay purchases. This can set off a vicious cycle of a stagnating economy. And this is not just a theory. Japan has been going through similar problems for over 20 years.
“There is a chance that the ECB can avoid the deflationary spiral by pumping more money into the economy. This would be a textbook solution and is comparable to the Bank of England's policy of quantitative easing. So far the ECB has been somewhat reluctant in going down that route, partly because of political pressure from Germany. But Mario Draghi's latest comments might signal a new resolve. Therefore markets are now expecting the Euro to become weaker, further spurred by political rumblings in Greece.
“However, exchange rates are notoriously difficult to predict. The Euro's slide might be short-lived if Draghi's statements are not followed up by action, or if it is too little too late.”
Danske's December View: Traders are Right to Sit on the Sidelines
Meanwhile, Danske Bank's assessment of the situation is one that sees no major negative event for the euro ahead of the year-end.
Commenting on the likely actions of the ECB Danske say:
"We expect the ECB to remain on hold in December as it waits for the take-up at the TLTRO auction in mid-December. Nevertheless, we expect Draghi to sound as dovish as he can without actually easing.
"This is our expectation despite dovish comments from a number of ECB members, including hints about potential government bond purchases, but our view reflects some opposition to more easing within the Governing Council.
"One trigger for more easing from the ECB would be that the current measures are not enough to boost the balance sheet, and so far the ECB still expects the balance sheet to move towards its early 2012 dimensions.
"However, after the take-up of the December TLTRO, the ECB should start to realise more is needed to boost the balance sheet towards EUR3tr, as the TLTRO is the measure with the largest potential to increase the balance sheet.
"The ECB will lower its inflation projection, but in our view it will mainly be in 2015 that the drop in the oil price will have a significant negative impact. For 2016 the ECB will probably keep the forecast almost unchanged, hence it can argue that in the medium-term the inflation outlook has not worsened.
"Over the past week in particular the periphery has rallied at the prospect of further easing, and a decent probability of government purchases is priced in by now.
"Hence, a very soft stance from Draghi is needed to avoid spooking the market. The money market should be less sensitive to Draghi’s ‘sweet talk’. Here the upcoming TLTRO uptake and LTRO repayments are the main events."
