Danske Bank on Eurozone's economy, the Euro and its short and long term forecasts

Our economists are looking for a slight improvement in the Eurozone's activity. The economy is recovering from a negative growth rate, and we believe that it is going to move the positive territory next year. Therefore, we expect some slight improvement, but nothing substantial in terms of Euro area activity. 

Obviously, the ECB has been able to side-line the Euro debt crisis through the Outright Monetary Transaction programme. Thus, that sort of improvement in sentiment in the Eurozone periphery has been under way since last autumn. Recently we have had some other issues resurfacing with the political crisis in Portugal, and over the weekend Greek negotiations with "troika". However, our view is that Euro debt crisis has been eliminated more or less permanently by the ECB and its OMT programme. Hence, we do not see a great risk of periphery threats widening in the near term, not at least after the ECB has provided a sort of forward guidance, where they have promised to keep rates low for an extended period of time.

If our predictions are wrong and the growth does not rebounds or the debt crisis resurfaces, then that would be a major threat to our outlook for the Eurozone to recover, and that would be very negative factor for the Euro. Also situation in China could be a major risk for the Eurozone as disturbing issues over its growth power have been evolving over the past two weeks. It is clear that the Chinese authorities has higher tolerance for lower growth, and that could potentially hurt the Europe's exporters, who send goods to China, and that could be very negative for activity in the Eurozone.

For the EUR/USD currency pair our forecast is 1.30 in three months, potentially a little bit lower, and in 12 months from now we have 1.26, while for the EUR/GBP currency pair we have got 0.86 and 0.84, respectively.