The euro’s 0.9 percent gain against the dollar last week to 1.1766 marked the end of a seven-week losing spell and offered hope to euro bulls; however, confidence in the single currency would be misplaced, say researchers at Danske Bank, who forecast “limited [euro] upside potential” between now and year-end. The euro remains down more than 5 percent since mid-April.
All-important to the euro’s outlook will be decisions made by the ECB relating to its massive bond-buying program. The end of ECB quantitative easing (QE) has been the subject of speculation for some time, but speculation went into overdrive midweek after the bank’s chief economist, Peter Praet, announced that he and his colleagues would discuss the matter at their meeting in Latvia this coming Thursday (June 14th).
“Next week, the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases,” Praet said.
QE has weighed heavily on the euro, which bought 1.6 dollars a decade ago, and its demise would be seen as wildly euro-supportive.
Danske Bank remains downbeat on Praet’s suggestive remarks. The ECB will “stay reactive rather than proactive,” it wrote in a note to clients on Friday.
Although Danske are in little doubt that ECB policy normalisation will eventually support the euro, this will “take longer to materialise on a wider scale due to [ECB] foot-dragging.”
Given a run of disappointing eurozone economic data recently, Danske “doubt the ECB will want to rush to announce an end to QE next week.”
Of a similar opinion is ING economist Carsten Brzeski, who told Reuters on Wednesday that the ECB would be reluctant to give up “room for manoeuvre on QE in a situation in which downside risks to the economy have increased and political risks could easily re-emerge.”
Danske Bank’s estimated median price for EUR/USD in the second half of the year is 1.18; the bank sees a return to the 1.20s as unlikely in the near term.
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