© Michael Sneyd
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We think that the rate cut from the European Central Bank was necessary given that the recent inflation data from the Eurozone has continued to move lower. The activities have been quite strong; however, the inflation is what key here. I think that is what makes their decision quite interesting, because the changes made to their policy last week are unlikely to have too much impact on the inflation outlook. Therefore, we at BNP Paribas think that the ECB will have to follow with further easing later in the year. We believe that is going to be via quantitative easing, taking steps to buy government bonds within the Eurozone. Taken all that into account, we think the cut was necessary, but in our view it is going to take more from the ECB to really push the inflation higher.
What performance do you expect from the Euro versus its major counterparts during the third quarter of year 2014?
We look for the Euro to weaken, partly because we think that the policy changes the ECB made last week will have a difference – it has lowered Eurozone yields, loosened up short term money market, and pushed the Euro lower. However, we believe that the Euro has room to decline further by the end of the Q3, given that inflation prints are likely to continue to be lower in the Eurozone and expectations will remain high for the ECB to move further and deliver QE. In terms of EUR/USD we expect the pair trading around 1.32 by the end of Q3. We also are bearish on EUR/GBP as we do have policy diversions between the European Central Bank and the Bank of England, thus we see EUR/GBP declining to 0.78.
Do you expect interest rates to be the most important driver? And what else could determine the common currency through Q3 this year?
We think that interest rates are going to be very important. One of the reasons for that is that with the ECB likely implementing further easing, we think the Euro is going to be used increasingly more by investors as a funding currency. At the moment we are in long carry environment, the U.S. Dollar is the main choice as funding currency by investors. However, with the U.S. data remaining fairly strong and the Fed ending its QE program later this year, we expect that the pattern of funding currency is going to move from the Dollar to the Euro. Therefore, the common currency will be one of the cheapest currencies, investors will be selling it by high using currencies mainly in emerging markets, and that is going to put downward pressure on the Euro across the board.
What are your forecasts for EUR/USD, EUR/JPY and EUR/GBP for the end of Q3 and the end of 2014?
We are looking for persistent depreciation trend and we expect the EUR/USD pair to be trading around 1.30 by the end of the year. Regarding EUR/GBP, we anticipate the pair to trade around 0.76 and EUR/JPY to hover around 143 by the end of Q3.