© Michael Sneyd
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We are starting to see an improvement in data from the Eurozone, particularly, in those forward looking components such as consumer confidence series. However, the ECB has been particularly keen to point out that although the signs of growth are starting to pick up, the economy is in a very poor state, the output gap is still very large; therefore the road to recovery is likely to be a long one. Our economists estimate that the economic cycle in the Eurozone is about one year behind the U.S. Hence, while the world's biggest economy is starting to look for the exit of its quantitative easing programme, the ECB is likely to have to keep the monetary policy loose for some time, and it will be negative for EUR/USD over the next year.
To what extent do you think the current uncertainties over the Fed's tapering of QE impact the Euro?
We are actually seeing the Euro being supported somewhat by the Fed's decision to proceed with the bond-buying programme and to start tapering either later this year or early next year. On the back of this we have seen that the market tapering expectations get pushed back and this caused the U.S. Dollar selloff. To our mind, the greenback now looks oversold particularly against the Euro, and what I mean by this is that EUR/USD is trading much higher than some of our fair value measure estimates. Thus, we expect that over next month or so we could see some of the appreciation that we have had recently in EUR/USD to come off and after that over next couple of months we are expecting a decline in EUR/USD to 1.28.
What performance do you expect from the Euro versus its major counterparts during the fourth quarter?
We are looking for a decline in the EUR/USD currency pair to the 1.28 area by the end of this year, and we could see a further slide to 1.26. We think that over a longer term horizon EUR/USD could continue to decline down to 1.25 by the end of next year. Versus the Sterling we expect that Euro could remain supported, and the main reason for this is that, in our opinion, the Sterling is looking slightly overbought at these levels following the strong data that we have had out of the U.K. recently. We expect that if we do get a slight pullback in the U.K.'s data, we could see the Euro gaining some support and EUR/GBP trading around 0.85.