Carolin Hecht, Currency Analyst at Commerzbank, on Eurozone's economy and EUR/USD

Source: Dukascopy Bank SA
© Carolin Hecht
Due to the fact that the Eurozone's economy shrank 0.6% in the fourth quarter, there is an opinion that Euro bloc might not be over the worst yet. How would you evaluate the Eurozone's recent economic performance?
Definitely, Eurozone economic data has disappointed and, thus, the downside risks for this year forecasts have increased. That is not to say, that we do not expect to see a turnaround in the leading indicators for the Eurozone though, and mainly for the core countries in the Euro area in Q1 2013. We still bank on a reversal of the downward trend for the Eurozone economic indicators. We believe that this week in particular, when we get the IFO index for Germany and PMI for the Eurozone, data will basically hint at the fact that we are through with the worst and that things will turn to the better.

What will determine the Euro's performance this year?
I believe one major issue at the moment is the question of competitive devaluation, because it is affecting all G-10 crosses and emerging market-crosses. In addition, we are seeing significant intraday responses in the spot rates to any headline related to comments from central bankers or politicians that are in favour or against the issue of competitive devaluation. I suppose, this will be a short-term theme for the Euro. In fact, during the February meeting, Mario Draghi sounded a bit more concerned regarding the impact of the exchange rate on inflation and growth projections. Even if the exchange rate is a very influential variable for growth and inflation forecasts anyway, the mere fact that he mentioned it, caused the pause in the EUR-USD upward momentum. 
However, our expectation is that Eurozone economic indicators should continue to improve slowly but gradually. We therefore expect that the upward momentum for EUR/USD should pick up again with this week's data potentially providing the starting point. 
Our EUR-USD forecast is hump-shaped: following a rise to 1.38 in Q1 2013 we expect EUR-USD to fall throughout the remainder of this year towards 1.28. This is mainly due to the fact that we believe that the Fed will be able to become less expansionary in the second half of this year. They may first signal to scale back the size of QE purchases and then end the bond buying towards end of the year or in the beginning of 2014. Similarly, the moderate growth picture for the U.S. should really kick in and support the U.S. Dollar. 

What is your forecast for EUR/JPY and EUR/GBP for the end of the quarter?
Our forecast for EUR/JPY it is 128 and for EUR/GBP it is 0.84.

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