© Adam Cole
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Over the course of the next quarter we see the Euro trading lower, down to around 1.02-1.03 against the US Dollar. Nevertheless, that is principally because the Dollar is rallying broadly rather than because we are specifically pessimistic on the Euro zone itself. It is all about plain vanilla US interest rates story; thus, I think that from the very low base the risk is that the US rate hike expectations rebuild, which, in turn, carries the Greenback higher including rallying against the Euro.
What will be the major drivers for EUR throughout the same period?
I think that beyond the general Dollar direction, the local factors could be expectations for the ECB policy and whether the news flow is sufficiently weak to keep the expectations of further easing alive. The third factor which I would list is one of effects specific to the second quarter, namely, the evolution of risk around the so-called 'Brexit'. If we see the risk of the UK exit rising, that would be negative not only for the Sterling but also for the Euro. Overall, we should keep an eye on how that evolves, as it is critical for the Q2 performance.
What are your forecasts for EUR/GBP and EUR/JPY for the Q2 of 2016?
At the current moment, we have the EUR/GBP forecast clearly heavily dependent on what hands in the UK Euro referendum. Our present forecast for the EUR/GBP for the Q2 stands at 71 and is based on technical assumption that the UK votes to remain, which could cause the Sterling to strengthen materially by the end of the quarter. However, I would change that substantially if the UK voted to leave.
For the EUR/JPY, we have 1.24 by the end of the quarter, seeing a slightly lower Euro; though, I would stress that most of the move that we have at the moment is not about the weakness of the Euro, it is the Dollar strength story.