ECB-Inspired Euro Weakness vs. Pound, Dollar to be Limited say Analysts

Above: Mario Draghi, President of the European Central Bank (C) European Central Bank.

The Euro looks set to end October on a soft note after it is sold off in the wake of the European Central Bank’s highly-anticipated policy decisions delivered on October 27.

The Euro was in the bottom-half of the G10 performance league for the week ending October 28 after the European Central Bank's warned that it is unlikely to raise rates for number of years. But, we are told by a couple of prominent analysts the Euro’s weakness is unlikely to persist.

The Pound-to-Euro exchange rate ended the week 1.0% higher at 1.1309, the Euro-to-Dollar exchange rate was 1.5% lower at 1.1608.

“The final big monetary policy decision of 2017 by the ECB has resulted in only modest financial market moves reflecting the very well-telegraphed nature of the decision,” says Derek Halfpenny, European Head of Global Markets Research at MUFG in London who reckons the big move in EUR/USD is more a result of Dollar strength than anything else.

We have reflected on the Euro’s weakness following the event in more detail here and subsequently report that some analysts believe the EUR/USD’s recent uptrend has finally capped.

Furthermore, we report that the potential for gains - albeit limited - in the Pound-to-Euro exchange rate have grown.

But, if Halfpenny is right, gains against the Euro by both Pound Sterling and the US Dollar should be limited and remain something of a short-term phenomenon.

Others agree.

"EUR sold off when the ECB extended its QE programme this week. The lack of significant dovish surprises, however, could see EUR stabilising before long, as investors turn their attention to the improving Eurozone data," says Oliver Marinov, analyst with Crédit Suisse.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

Renewed Euro Appreciation in 2018

The Euro could well trade around current levels, or even go lower in the near-term against the Pound, particularly as the Bank of England looks to raise interest rates in November, and potentially again in 2018.

Meanwhile the Dollar appears to be getting fresh support from evidence US President Trump might be able to deliver on tax cuts over coming months - something that has shown to be supportive of the USD in the past.

But, the Eurozone’s prospects remain encouraging and MUFG's Halfpenny believes the single-currency’s period of appreciation is not yet done.

Therefore, the message is to allow short-term weakness in the currency but expect the macro-trend of Euro appreciation to ultimately resume.

“We continue to see EUR/USD remaining in the current consolidation phase but expect renewed euro appreciation in 2018. The euro-zone has experienced a sustained period of investor pessimism over much of the last decade through the period following the Great Financial Crisis and the euro-zone periphery debt crisis,” says Halfpenny.

MUFG say optimism amongst investors towards the Eurozone remains elevated, “which is borne out by the huge record demand for euro-zone equities”.

Furthermore, Halfpenny observers:

“EUR/USD is not being driven by short-term yield spreads. The investor adjustment likely has further to run as euro-zone economic conditions remain positive. We are now also beginning to see some increased appetite for euro exposure.”

ETF flows monitored by MUFG (iShare MSCI Euro-zone ETF) are now showing inflows retuning to the unhedged version following a period of outflows when EUR/USD initially jumped to levels close to 1.2000.

“The longer EUR/USD consolidates at current levels, the more confident investors will become of the potential for further gains ahead. We continue to expect EUR/USD advancing to around the 1.2500 level by mid-2018,” says Halfpenny.

This view of relative Euro resillience playing a self-reinforcing role in longer-term Euro strength, is shared by Crédit Suisse's Marinov:

"With fewer fears of currently depreciation the single currency is likely to become more positively correlated with risk sentiment. Hence, we stay in favour of buying euro on dips."

So for the bulls, this is a buying opportunity and for those hoping for a stronger Euro to purchase Dollars and Pound's the message is to sit tight if you can. Only, if these two analysts are correct of course. 

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.