EUR/USD Forecast to Bottom Out Above Parity by Commerzbank
EURUSD forecasts for 2016 at Germany's Commerzbank show the exchange rate is likely to reach a low-point at just above 1.0 in 2016 despite another European Central Bank interest rate cut.
While analysts at the German bank do see the euro to dollar exchange rate falling closer to parity later on in 2016 they do not see any significant declines below 1.0.
The reason for the call lies with what markets are expecting and as things stand there should be four interest rate moves at the US Federal Reserve in 2016.
This contrasts to the potential for further interest rate cuts in Europe in 2016. So while the Fed cuts money supply, the ECB could be looking to expand supply.
This should ensure the flow of currency from Europe to the US continues - a scenario that will likely keep the EURUSD exchange rate under pressure.
US Fed: Four Rate Hikes in 2016
The Federal Reserve Board’s vice chair Stanley Fischer has told markets in an interview that while volatility could alter the timing of rates, the overall path of rate rises remain steady.
The uncertainties had risen but he believes that the expectations of four rate moves in 2016, as indicated by the projections of FOMC members, should be “in the right ballpark”.
The bottom line is 2016 is the year in which we see interest rates move steadily higher and the flow of US dollars into the markets dry up.
ECB: Expanding Money Supply
The big issue for the ECB remains their inability to get inflation back to their 2% target.
The most recent set of inflation numbers hit the euro exchange rate as it was confirmed the Eurozone continues to teeter on the edge of deflation.
Board member Peter Praet said the ECB was ready to take any measures necessary to send inflation to two percent: “If you print enough money, you will always get inflation. Always.“
If you print enough money you will also guarantee a lower exchange rate.
Board member Peter Praet said the ECB was ready to take any measures necessary to send inflation to two percent: “If
you print enough money, you will always get inflation. Always.“
In addition, falling oil prices are a problem for the ECB as it is now even less likely that its inflation target can be met in the foreseeable future.
“It will thus have to sharply scale down its inflation projections at its March meeting. This would also be the time to introduce more expansionary measures. We expect the deposit rate to be cut by 10 basis points and the QE programme possibly to be extended beyond March 2017,” says Commerzbank’s Bernd Weidensteiner.
Euro Forecasts 2016
Commerzbank see a lower euro in 2016 - but they do not see a rout similar to that of early 2015. (How do these forecasts compare to the other major institutions? Look here).
In a note to clients Commerzbank say:
“The monetary policy 'spread' between the USA and the euro zone should widen further in 2016, which could put more depreciation pressure on the euro initially.
“However, the markets have already factored in the divergence of Fed and ECB monetary policy. The euro hugely depreciated between mid-2014 and spring 2015, which limits the potential for further euro weakness. The euro should therefore not fall too far below parity.”
Commerzbank forecast the euro to dollar exchange rate to reach 1.06 by the end of March, 1.01 by the end of June, a recovery back to 1.05 by end of September. The end of 2016 sees a forecast of 1.03 for the euro dollar rate.
Looking at the euro to pound sterling exchange rate, analysts forecast the rate to reach 0.71 by the end of March. This moves to 0.68 by the end of June ahead of a recovery towards 0.7 by the end of September. A decline back to 0.68 is seen by the end of 2016.
Turning the equation around for those looking at the pound to euro conversion, 0.68 EURGBP = 1.4706 GBPEUR. 0.71 = 1.4286.
