According to analysts who say that it is set to ride a wave of improved euro zone data and weakening investor conviction in the U.S., the euro could be on track to hit $1.20 against the dollar before the year is out.
After Euroepan Central Bank (ECB) President Mario Draghi pointed to plans to begin discussing possible changes to its quantitative easing (QE) program in the fall and said the euro zone was showing signs of “unquestionable improvement”, the single currency hit a two-year high of $1.1655 against the dollar Thursday.
Seen in the immediate wake of the ECB’s decision to keep interest rates on hold, it moved higher to $1.1668, up significantly from the low of $1.1488, in early deals Friday. The upwards momentum is set to continue, analysts suggest. “I think euro/dollar has started moving towards equilibrium,” Vasileios Gkionakis, managing director and co-head of strategy research at Unicredit, said.
“It has been undervalued for quite some time, and now the market has started pricing in that upcoming normalization from the ECB.”
Before moving to gradually hiking interest rates from the following year, the central bank could announce in September plans to reduce its asset buyback program from early 2018, analysts anticipate even though Draghi did not set a time frame for tightening.
“Investors believe that the ECB QE programme will go to 40 billion euros per month during the fourth quarter of 2017 and that the negative deposit rates will go. This has been my view for the last three months and I assume that QE will end in 2Q18,” Bob Parker, investment committee member at Quilvest Investment Management, said.
A positive for the euro is marked by these indications. It has shown broadly upwards momentum against the dollar which has been hit by a number of political setbacks in Washington after it had suffered a volatile ride since lows of $1.0404 in January.
Before rising further to $1.25 in 2018, this could see the single currency run as high as $1.20 by the end of the year, for Parker.
“The background is that all euro zone data shows as uptrend and deflation risk is greatly reduced. Conversely, the recent U.S. retail and inflation data are weak suggesting that the Fed will moderate its interest rate increases,” said Parker.
“I stick to my forecast of $1.20 during 4Q17 and $1.25 during 2Q18.”
Though he tempered his estimates, Gkionakis agreed that the currency would likely go higher.
“I think it’s more likely that it will go higher,” Gkionakis said. “We can get these back and forths … but I think it’s quite clear that the economic dynamics are moving in the right direction in the euro zone.
“Our forecasts are a bit on the cautious side right now — we currently have it at $1.14 by year end — but I certainly see the risks to the upside,” he added.
In late June, when Draghi’s hawkish tone during an ECB Forum in Sintra, Portugal set the euro higher, the ECB will be keen to avoid another mini tantrum like that and will be acutely aware of how its signals impact the market.
Investors should expect the ECB to quickly step back in if the gains move too quickly, suggested BNP Paribas’ head of European market economics, Luigi Speranza.
“Should the euro strengthen further from here, we would not be surprised if, over the next few days, the ECB were to ramp up its rhetoric on the risks posed by tighter financial conditions to the growth and, more importantly, inflation outlook,” Speranza said.
(Adapted from CNBC)