© Ulrich Leuchtmann
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In the past couple of weeks we have witnessed Euro's strength across the board. Moreover, if we look at the Euro versus the U.S. Dollar currency pair, it is impossible to know, whether the strength comes from the U.S. Dollar or the Euro side. However, according to our quantitative analysis in the last week, it is possible to see clear signals at most of the up move in the EUR/USD due to the Euro strength. Partly, it seems to be surprising as the ECB is talking a lot about further expansionary measures; however, I do not believe this is on the cards of the market participants. In my opinion, a lot of the market participants still have their bets on the ECB, at least, to wait quite a while before taking any measures, which basically explains why we see the Euro strength.
What drivers will play a key role in the performance of the Euro till the end of the year?
In my opinion the Euro would suffer massively, if the ECB does something on the 5th of December meeting – as it is not priced into current Euro exchange rates. However, if the ECB takes no action, it would depend very much on the way Draghi talks on the press conference. In case Draghi indicates that the ECB will take certain action in foreseeable future, then this will be considered as nearly as bad as an instant action in December. Thus, it depends on: a) will the ECB take any action; b) will the ECB indicate that they will take any action in due course. Moreover, it relies on what the ECB is going to do. I believe that mildest action would be a certain form of LTRO, while a much more aggressive decision would be a rate cut into negative territory or some form of quantitative easing. Therefore, if one of the listed forms occurs, or is indicated in December, then we might see Euro weakness. In case there is no action, my opinion is that the Euro exchange rates on the current level are justified.
What is your forecast for EUR/USD for the end of this year and what trend in Euro do you see next year?
Our estimate for EUR/USD at the end of 2013 is 1.35. Therefore, we can basically see a sideways move with a little bit downward potential due to the risks surrounding the December ECB meeting. As concerns the year 2014, we may witness a mild downward move in EUR/USD exchange rate and we are forecasting the currency to drop to 1.28. Therefore, not a big move, however, we expect some moderate Euro weakness due to expectations that the Fed would start tapering at low speed. Consequently, we are not seeing anything dramatic in terms of EUR/USD. Yet even in case the Fed starts tapering in smaller volumes, it should positively impact the U.S. Dollar, while having a negative effect on the Euro, as it will bring more clarity to the future cause of U.S. monetary policy.