Euro Exchange Rate Forecasts vs Dollar and Pound Point to June Weakness

What does the outlook hold for the euro against the pound sterling and US Dollar? We bring you the views from some of the leading institutions we follow.

Pound v euro remains in long-term uptrend confirms technical research.

The euro exchange rate complex appears to have seen its strong April/May run come to an end and a fresh set of forecasts suggest selling pressure is likely to continue.

Analysts at Goldman Sachs echo the views of many in the market when they say they are looking to hold their long positioning on the US dollar against the euro and Japanese Yen. Long-term plays that are looking for declines in the EUR-GBP are equally popular as markets continue to bet on an early 2016 interest rate rise at the Bank of England.

• At the time of writing the euro to dollar exchange rate (EURUSD) is seen at 1.0975 - this is 0.4% higher than on Monday's close.
• The euro to pound sterling exchange rate (EURGBP) is at 0.7214 - 0.35% higher on a day-to-day basis.
• The pound to euro (GBPEUR) is at 1.3868.

Be aware that any currency rate referenced here refers to the wholesale markets, when you make an international payment / transfer your bank will offer you a rate at their discretion. However, using an independent provider will get you closer to the market rates, in some instances this results in up to 5% more FX being delivered, find out how.

Near-Term Strength Seen

While the main focus of this report is the potential decline of the euro rate complex in June, we are seeing some strength on Tuesday the 2nd - this should not come as a complete surprise as bouts of out-performance should be expected.

The USD has rallied significantly since the beginning of May, "but with a distinct lack of macro fundamental support behind it," note Lloyds Banking Group. That and the fact that the US rates markets are not supporting the move (the 2-10 U.S. curve steepened into the end of last week) leaves the USD looking vulnerable to a sharper pullback if we don’t get strong data this week to support it.

Watch out for Friday's non-farm payroll data - if it disappoints then we could see the euro stabilise further.

Ultimate Weakness

Short-term volatility aside, the longer-term downtrend in euro dollar is expected to extend. “The euro holds up well considering the uncertainty over the next few weeks. We continue to like the pair lower. Key levels for the session: Support comes in at 1.0860 then 1.0844, Resistance at 1.1000 and then 1.1050/60,” say Goldman Sachs in a strategy note to clients.

Market skepticism and conflicting headlines over Greece should keep EUR/USD under pressure.  Creditors have until the end of the month to work out a deal and they may opt to take their time in the hopes that they could strong arm Greece into real reforms.  "In addition, while we do not expect the Federal Reserve to raise interest rates this month, their updated forecasts and Janet Yellen's press conference could give the market the impression that they are moving closer to liftoff, which would be positive for the dollar," notes Kathy Lien at BK Asset Management.

Morgan Stanley’s Ian Standard also runs with the Greek risk theme as a basis for his negative stance on the shared currency's outlook:

“While a Grexit scenario is still our most bearish, where we would expect a sharp decline for EURUSD, the case of Greece missing a repayment, which could trigger the introduction of capital controls, is also likely to result in significant EUR weakness, even if this does not lead to an exit from EMU.

“While the immediate EUR decline may not be as great as under the Grexit scenario, it is likely to be prolonged as uncertainty would persist. Legal and constitutional questions could also arise, with the principles of EMU seemingly being challenged.”

Upside risks do however materialise should a Greek resolution be found. That said, any positive EUR reaction to a compromise is likely to be short-lived.

A compromise between Greece and the EU, allowing the release of the existing bailout funds, would initially be seen as progress and could see EUR rebound in the near term suggests Stannard. However, the analyst believes the sustainability of the rebound is likely to be questionable.

Euro to Pound Sterling Outlook

With regards to the outlook facing the EUR-GBP we note that data continues to suggest the UK economy will outperform rivals. Latest data from the CBI shows UK economic activity has surged to a 12 month high.

This will no doubt keep currency markets betting on an interest rate rise by the first quarter of 2016 at the very latest. This bullish stance on interest rate rises contrasts to the Eurozone situation where interest rates are likely to be at record lows for longer.

Technically speaking the charts continue to advocate for further losses.  

“EUR/GBP is increasing but remains in a medium-term declining channel. A succession of lower highs suggests a weakening momentum. Resistance can be found at 0.7283 (18/05/2015 high) and support is given at 0.7056 (27/05/2015 low),” says Yann Quelenn, a Market Strategist with Swissquote Bank in Geneva.

In the long-term, prices are in an underlying declining trend. “However, the potential successful test of the key support at 0.7089 (03/12/2007 low) and the general oversold conditions suggest a limited medium-term downside potential. A key resistance lies at 0.7592 (03/02/2015 high),” says Quelann.

Deutsche Bank have meanwhile, in their latest FX Blueprint, reiterated their recommendation for a sell on EUR-GBP in anticipation of further weakness. "We do not see valuation as a constraint. The last two major EUR/GBP retracements have been worth just over 30% peak to trough, which would leave another 5-6% to go from current levels. We revise down our forecasts for EUR/GBP to 0.68 by the end of the year,"

The British Economic Outlook

The Manufacturing PMI data out from Markit and the CIPS on Monday disappointed slightly despite confirming the sector continues to grow. Tuesday will deliver the Construction PMI and then the all-important Services PMI comes mid-week. Each offers sterling the chance to rally (or correct lower yet further) against the euro. 

Services PMI will undoubtedly be the most significant as it accounts for over 70% of the economy, “we are in line with consensus in looking for the Services PMI to moderate slightly from 59.5 to 59.1. The risks around this seem balanced. The strength in the sector is generally overdue for some moderation and  there were only minor reports last month of electoral uncertainty restraining activity,” says a preview issued by TD Securities.

That said, following the CBI data which showed that UK services are powering ahead there could well be the chance that the data beats expectations. If this is the case then look for the euro to be pushed lower against the pound sterling.