© Nordea Bank
|
The Euro is very weak at the moment. All the concerns about possible Greek exit from the Eurozone are hurting the single currency. Fears about situation in Spain, its recession, high unemployment, and budget problems are also weighing on the Euro. There are also political uncertainties in Greece, with a new date of the parliament elections on 17 June.
On the very short horizon attention turns to the EU summit tomorrow. I do not think it is going to be an event that will trigger a very sharp moving in EUR/USD, but it will highlight the different opinions of Germany, which is very hostile and determined to keep fiscal pact as it is, and of France with a new president being very eager to get some agreement on growth initiatives. I think it would be very difficult to reach an agreement that might give a hope for greater growth in the Eurozone. This is another negative impact on the Euro economy and also for the European debt crisis, that has a very low growth outlook. Germany is till doing surprisingly well with strong export sector, and sharp falling in unemployment rate. On the contrary the growth outlook of the southern European countries, including France, is very bleak, because of the fiscal tightening that hampers economic growth. It is getting very difficult to solve the budget and debt problem in these countries. Therefore, we have a quite negative outlook for the Euro.
We see a risk that the ECB might find it problematic to cut rates, which might be possible in the future. It is not a central scenario yet, still we think that the ECB might loose monetary policy in the Eurozone.
At the same time an encouraging economic data came from the US at the beginning of the year. However, lately it has been a bit softer and we expect it will continue to soften in the short term. Nevertheless, looking into the second half of this year, we expect a new peak up in the activity of the US, more job creation, strong consumer and business confidence. We see growth gaining momentum in the US and higher market interest rate towards the end of this year and next year. Although we do not expect an early hike from the Fed, but market rates will react much sooner than the official rate is going to be increased. To sum up, the interest rate differential should also move in favour of the US Dollar against the Euro.
What effect might have the results of Greek elections on the Euro on June 17?
There are a lot different scenarios. However, the best outcome for the Euro will be if large central parties are able to form a government, without relying on some of the far right or far left parties. But if we get a hung parliament once again, thus the official will need to form a coalition government, there are going to be uncertainties on how long the government will last. There will be ongoing uncertainties about political situation, and about Greek determination to fulfill the budget requirements of the Troika (the European Commission, the ECB and the IMF) and be entitled to fiscal aid.
What is your forecast for EUR/USD for the end of the 2 quarter and by the end of the year?
We expect EUR/USD to trade at 1.15 at the end of the year, while our forecast for the Q3 is 1.20.
What will be the main drivers that will determine the pair performance in the short and long term?
We think the main key driver in the long-term for EUR/USD will be interest rate differential, as well as stagnation in the Eurozone and growth momentum in the US. The European sovereign debt situation is not going to be solved solely by Greek elections. The main reason why the Eurozone turmoil will persist is there is a low growth in the Euro bloc. To solve the European debt situation we need economic expansion in the Eurozone and unfortunately we are not seeing that.