Euro Rate Latest: Barclays Forecast EUR Down vs Pound Sterling and US Dollar, Warns ECB to Take Fresh Action

At the present moment we are seeing the euro come under pressure as geo-political tensions increase demand for those assets deemed to offer safe-haven qualities. The USD and GBP are meanwhile winners of the current set-up.

However, investors remain curiously nervous on betting the euro dollar exchange rate lower by a substantial amount.  A report from researchers at Barclays suggests tight interest rate differentials between the Eurozone and the US as being a continued source of support to the EUR.

That said, a report to clients by Jose Wynne and Aroop Chatterjee at Barclays forecasts that the euro will ultimately have to decline in coming months.

Barclays believe in a lower EUR on two main counts:

"First, we expect the Fed to begin dropping its dovish bias and the market to price it, an issue we have debated several times in the past and as recently as yesterday, in our last GMD focus. This factor alone would be enough to send EURUSD lower and seems to be gaining some momentum.

"Second, we see rising risks that the ECB will have to address the disappointing market effect of its recent measures."

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While one could argue the jury is still out, Barclays point to mounting evidence that the market perceives the ECB policy actions as insufficient to address the disinflation problems.

"We do believe, as many do, that the threshold for triggering a set of unconventional policy responses remains high," says Wynn and Chatterjee.

However, they believe that circumstances increasingly call for more action, and therefore risks are rising that we will see more ECB action than most expect. Should this prediction prove to be correct then markets will be foreced to reprice the euro at lower levels.

More action needed at the ECB - a negative for the euro exchange rate complex

Both the pulse of the economy and market reaction suggest the policy stimulus may be insufficient and the analysts believe the Bank will have to act.

Should this forecast be proven correct then we would predict a fresh decline in the euro dollar and euro to pound sterling exchange rates.

What, when and how more stimulus will be delivered is less clear to Barclays, but they do believe a weaker EUR is an important channel for reflating the economy.

The price action during the ECB meeting on June 4 is quite telling; for unclear reasons, "EURUSD ended up stronger on the day, after weakening for a few minutes. The 5y breakeven in Germany moved inversely with the EUR, with a little lag, but it ended flat as the currency reversed course. This occurred despite the duration rally triggered by a policy decision that was clearly not priced."

Indeed, it is argued that the price action highlights an important message: the market may be telling us that a weaker EUR is the main channel for reflating the economy.

Commenting further Wynne and Chatterjee say:

"This means that if one, like most markets participants, judges the ECB policies as insufficient, and believes that it will do more, the best way to express this view is to sell EUR.

"All other ideas to express ECB action involve unnecessary risk, in our view, given that the ECB may surprise by the tools it chooses. It is less likely to surprise on the channel through which policy seems to work."

Euro rate today:

At the time of writing the euro pound exchange rate (EUR/GBP) is trading marginally higher than seen at Friday's close at 0.7922.

The euro to dollar exchange rate (EUR/USD) is unchanged at 1.3529.

The euro to Canadian dollar (EUR/CAD) is 0.08 pct up at 1.4532.