Euro Dollar Forecast for 2015 Warns of Continuation of the USD Rally

The US dollar exchange rate complex (USD) has enjoyed a stellar run on global markets through 2014, but after a period of consolidation we ask whether the rally can return?

The USD had looked invincible at one stage with a record run taking us into October.

However, US data has softened recently calling an end to the strong performance. Despite the recent consolidation many currency analysts expect the US economy to outperform globally with the monthly NFP expected to come out around 250,000 in coming months.

This will likely spark the next round of USD buying which could well be a feature of 2015 say analysts.  

Recent price action in the euro dollar exchange rate (EUR/USD) is seen below:

\

At the time of writing the EUR/USD is quoted as being at 1.2754.

Note: If you are looking for a better rate ensure your FX provider has placed the relevant buy and stop-loss orders to ensure you get the right rate when it is hit, find out how here.
Note 2: The above levels, and all rates quoted here, are from the inter-bank markets - your bank will affix a spread at their discretion when passing on a retail rate. However, an independent provider will seek to undercut your bank, thereby delivering up to 5% more FX in some instances. Please find out more.

Danske Bank: Beware the Euro Rally

Euro-zone growth has weakened substantially and the weakness is likely to continue near term and this will drive down the euro element of EUR/USD say forecasters at Danske Bank.

Thomas Harr, Chief Analyst at Danske does however warn us that the near-term will likely see some euro buying:

"Near term, EUR/USD is likely to consolidate on weaker US data and positioning where we expect that 1.30/1.31 will provide strong resistance. However, we expect a possible EUR bounce to give way to the next leg of EUR weakness as the market speculates that the ECB will have to do more to lift inflation expectations and investors continue to buy the USD as an asset currency.

"We expect EUR/USD to rebound on a six- to 12-month horizon as eurozone deflation risks disappear and the growth differential between the US and eurozone narrows."

Ultimately, Weaker Euro on ECB Action

Looking further ahead, Danske joins fellow forecasters in calling a weaker euro on European Central Bank (ECB) action.

At the same time the US dollar will benefit from contractionary monetary policy at the US Fed:

"The Fed’s purchase of Treasuries and mortgagebacked securities (MBS) will end this month.

"The ECB was a bit weaker at its latest meeting about the ‘soft’ target of taking the ECB’s balance sheet back to 2012 levels, stating that the purchases of ABS and covered bonds will have a sizeable impact on the balance sheet."

The bottom line is that the end of Fed QE and the ECB’s unconvetional easing measure will reverse the trend in the two central banks’ balance sheets, supporting the
case for a lower EUR/USD.

According to Harr positioning suggests that the downtrend in EUR/USD will be gradual - IMM data shows that speculative short EUR/USD positioning is at stretched levels, currently at the 7th percentile.

EUR positioning has been relatively stable in recent weeks suggesting a new catalyst is required to drive positioning further.

Short EUR positioning is a risk for Danske's bearish EUR/USD call, but the downtrend remains firmly in place.

The eurozone continues to run large trade and current account surpluses. However, the large trade surplus reflects a collapse in domestic demand rather than booming exports, which provides less cyclical support for the EUR. Short-term trends in EUR/USD are driven by portfolio flows rather than trade flows.

But, beware risks to this forecast.

"Over the past month, the risk to our macro view is that the US softens more than we expect on weaker global growth. IMM positioning shows that long USD speculative positioning is the biggest on record. A sharp weakening of US data will weigh on the USD given positioning," says Harr.