Euro Forecast: Losses Ahead Warn Deutsche Bank Who See ECB Starting Asset Purchases to Deal With High Exchange Rate

The pound sterling (GBP) has enjoyed gains through 2014 as the Bank of England looks to start raising interest rates, this could happen in early 2015.

The US dollar has also enjoyed gains as the US Fed looks to raise its base rate, perhaps in mid-2015.

Those hoping for a stronger euro will however be disappointed - the European Central Bank (ECB) appears to be headed in the opposite direction as the Eurozone economy remains in stagnation. Money printing could well be on the cards.

Euro rate today, the following exchange rates are noted at the start of September:

• The euro to dollar exchange rate (EUR/USD): 1.3132.
• The euro to pound exchange rate (EUR/GBP): 0.7912.
• The euro to Canadian dollar rate (EUR/CAD): 1.4300.

(Remember these are spot market rates to which a discretionary spread is added by your bank/provider. An independent FX provider will however guarantee to undercut your bank's offer, in some cases delivering up to 5% more FX. Please learn more.)

Deutsche Bank: Expect Euro-Negative Action Soon

Before taking in this negative assessment of the euro, it is worth catching up with the viewpoint held at Barclays where analysts remain conviction sellers of the shared currency.

Deutsche Bank have told us they are bringing forward their call on 'private' quantitative easing at the ECB; if correct this will surely have negative implications for the currency.

Deutsche had seen the buying of assets happening in 2015, but the viewpoint is now maintained that signs suggest the central bank could begin as early as September 2014.

'Private' quantitative easing (QE) differs from the QE carried out at the Bank of England and US Fed in that it does not involve sovereign bond purchases - Deutsche Bank reckon this powder will be kept dry incase the Eurozone enters a full-on deflationary environment.

"We believe the ECB will engage in private QE, that is, ABS purchasing as a complement to the TLTRO. If private QE does not emerge in September, we think it will follow shortly thereafter," says Mark Wall, Chief Economist at Deutsche Bank.

The outlook for the euro remains hampered by the sinking levels of inflation in the Eurozone.

Many in the currency markets believe the recent speech by ECB President Mario Draghi at Jackson Hole to be significant in that it lays the path to further action at the ECB based on falling inflation.

Draghi said the Governing Council 'will acknowledge' recent developments with inflation expectations and within its mandate 'will' use all available instruments needed to ensure price stability over the medium term.

"There is a definitiveness to the message. Having questioned the stability of inflation expectations, it would be very difficult for the ECB to credibly claim on 4 September that inflation expectations 'remain firmly anchored', at least not without announcing a new policy to better anchor those expectations," says Wall.

Pushing the Euro Exchange Rate Lower

Furthermore, Deutsche Bank reckon that all this feeds into the view that the ECB remains committed to a lower euro exchange rate in order to keep Eurozone exports competitive.

"The route to the success of ABS purchasing will be via the expansion of the ECB balance sheet and the impact of this on the EUR exchange rate," says Wall.

Deutsche Bank FX strategists reckon that of the roughly 4% decline of the euro trade-weighted index since March roughly a quarter of this was the negative deposit rate and the remainder implies an expectation of roughly E300bn of ECB balance sheet expansion.

"ABS purchasing will have to go beyond this to keep the EUR on a downward trajectory. Maybe this is what the ECB has most in mind," says Wall.

As Draghi said on Friday, outright ABS purchases, "would meaningfully contribute to diversifying the channels for us to generate liquidity".

In all, the risks to euro exchange rate downside at the present time far outweigh the risks to the upside in our opinion.