Euro Forecast 2015: EUR/USD Exchange Rate to Hit 1.12 at the Very Least

However - be aware of sporadic US Dollar weakness as long positioning on the greenback becomes over-extended.

Put simply, the road lower in EUR/USD will be bumpy as the market will struggle to continually find the numbers of buyers required to keep pushing bids on the USD.

Nevertheless, these moments of relief for euro-sellers will most likely be greeted as just another opportunity to reload short positions by the trading community.

Where is the Euro and Dollar Now?

At the time of this article's last update we see the euro to dollar exchange rate is at 1.14 following the announcement of sovereign quantitative easing at the European Central Bank.

(Please note that all FX quotes here are from the wholesale markets - your bank will affix a spread to the rate to derive profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances.)

Euro Forecast to Struggle in 2015

The outlook for the euro against the dollar and British pound remains challenging as the Eurozone economy continues to struggle overall.

Growth momentum is weak and rising deflationary concerns prompted the ECB to ease policy very aggressively in January 2015 via the announcement of a programme of quantitative easing. 

"The contrast with a growing US economy (tracking north of 3% growth for Q3) and the Federal Reserve's tentative steps away from extraordinary policy settings could not be starker," says a note from TD Securities to clients.

TD Securities say they remain bearish on the EUR outlook as a consequence.

Adding to the negative tone are Morgan Stanley:

"The Eurozone economy continues to demonstrate low domestic capital returns, dismal investment, disappointing employment and high savings. EMU banks’ return on assets has declined to 0.4% per annum compared to 1.5% in the US.

"European bankers seeking to increase these returns will have to look abroad to push bank profitability higher, in our view. Hence, EUR is likely to become the world’s main funding currency. Accordingly, an upside correction in EUR will likely require EMU banks to stop looking abroad."

Morgan Stanley currency predictions see the EUR/USD at 1.18 in the second quarter 2015, 1.14 in the third quarter and 1.12 by year-end.

Bullish on the US Dollar Through 2015

TD Securities confirm they sit with the majority of analysts in remaining bullish on the USD outlook in the medium to longer term.

"We continue to believe that USD-supportive fundamental, structural and technical factors are aligned in a way that suggests the trend appreciation in the USD is likely to extend broadly into 2015.

"More so now that the latest FOMC meeting, whilst acknowledging soft inflation and persistent labour market under-utilisation, persuaded market participants that rates may rise slightly more quickly than previously expected.

"The outlook contrasts with sluggish growth and relative easy or easier monetary conditions in much of the rest of the G-10 space (and increasing focus on fragilities exposed in developing markets by the prospect of US monetary tightening). We think the DXY will end this year a little above 86 and rise another 4.5% roughly in the coming year."

BUT - Beware a US Dollar Correction Lower in Medium-Term

There is a caveat to that generally constructive view, however. USD's broader bull-run has extended for ten weeks now.

"This is an unusually lengthy period of uninterrupted gains, which, based on the history the DXY index movement since the late 1970s, is liable to end soon, though perhaps with a whimper rather than a bang," say TD Securities.

Meanwhile Omer Esiner at Commonwealth Foreign Exchange points out that the rising dollar could soon prove a headache to US policy makers:

"This marks the 11th-straight week of gains for the greenback, a trend that is unmatched in the dollar’s history since it was floated from the gold standard in the early 1970’s.

"The historic rise in the greenback however is beginning to rattle global markets, as evidenced by yesterday’s over 260-point drop in the Dow Jones.

"A rising dollar not only makes U.S. exports more expensive, but it undermines the value of overseas profits for multi-national companies. It also puts downward pressure on the value of imported goods."

We believe it is too early for policy makers to start actively talking down the USD to protect US exporters; however we would suggest that this could indeed be a possibility in 2015 should the rally in the USD run its course.