FX: Euro / Pound and Euro / Dollar Exchange Rates FORECAST Lower at Barclays as ECB Decision Bites

If the intention of the ECB was to tame an expensive currency, then surely the Bank has failed? Not so, argue Barclays who have delivered their assessment of the EUR complex following June's all-important meeting. Analysts at the bank forecast the euro to maintain a negative tone going forward.

For your reference, the following conversions are available for reference:

• The euro to dollar exchange rate is 0.07 pct lower on a daily basis at 1.3538.
• The euro to pound exchange rate is 0.11 pct down at 0.8076.
• The euro Australian dollar exchange rate is 0.17 pct lower at 1.4432.
• The euro Canadian dollar rate is 0.09 pct down at 1.4761.

Beware, the above mid-market rates will attract a discretionary spread from your bank or FX provider. An independent provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more currency. Please learn more here.

Barclays forecast the euro to sink lower as ECB battles deflation

The ECB’s objective is to raise inflation from unacceptably low levels well below its mandate of “less than but close to 2%” and a crucial element of doing so is to keep inflation expectations anchored near the Bank’s target.

Last week’s ECB meeting succeeded in beginning to turn the tide of inflation expectations.

"The exchange value of the EUR is not a measure of ECB success. Of course a weaker EUR would help the ECB achieve its inflation goal and likely would be welcomed. But in a large economy like the euro area, inflation expectations are far more important in meeting the ECB’s inflation target than the exchange value of the euro," says Marvin Barth at Barclays.

Barclays expect the ECB’s success with inflation expectations also will succeed in driving a trend of EUR weakness. Barclays have repeatedly highlighted the importance of real interest rate differentials in supporting EUR strength. But real interest rates are based on expected, not realised inflation.

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"The ECB’s clear commitment to raise inflation – and demonstrated credibility, according to inflation swaps – is raising inflation expectations, lowering real interest rates. We have a high conviction that the EUR will follow suit," says Barth.

The analyst goes onto say that ultimately the euro should fall:

"The temporary rebound in the EUR post ECB meeting is puzzling, but does not change our view. Short-term market dynamics are often difficult to explain, but fundamentals always prevail over any reasonable horizon, as demonstrated by the EUR’s depreciation since the ECB’s May meeting commitment to ease policy.

"Both market pricing – note the huge inversion of the short-term vol curve for EURUSD (Figure 2) – and anecdotes strongly suggest that FX market participants were long volatility going into yesterday’s ECB meeting, and the rebound may be related to position management.

"But we remain convinced that the ECB has turned a corner, both in its own commitment and its credibility with markets, to raise inflation. The associated decline in real interest rates should push the EUR lower."