Euro exchange rate forecast at Bank of America Merrill Lynch lowered, Standard Chartered say EUR poised for further weakness

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Published on Friday, 06 July 2012 12:39

Written by Sam Coventry

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"The ECB's rate cut energises the bearish case for the euro (EUR) and the currency now appears poised for renewed weakness" - Standard Chartered.

The outlook for the euro (Currency:EUR) has deteriorated according to a number of investment bank and research houses. Here we look at what Bank of America Merrill Lynch Global Research and Standard Chartered have to say on the matter.

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At present the euro dollar exchange rate is 0.28 pct lower on a day to day basis at 1.2359 while the euro pound exchange rate is 0.3 pct down at 0.7956.

Yesterday the European Central Bank (ECB) acknowledged the risks threatening the euro-area economy and banks, delivering some relief through a 25bps cut to the main refi rate, as well as to the deposit and marginal lending rates.


"We push out our core EUR forecast, now looking for EURUSD at 1.20 by end Q3 and then rising slowly through the end of the year. We expect the EUR-USD to fluctuate between 1.20-1.25 during the second half of the year, as most of what has brought the currency down to these levels remains in play; this forecast also reflects a shift in our projection path," says a note to clients from Bank of America.

Standard Chartered are also forecasting further euro falls:

"The ECB's rate cut energises the bearish case for the euro (EUR) and the currency now appears poised for renewed weakness. The move may encourage investor risk appetite more broadly, however, and developments elsewhere have also been supportive of confidence. The US employment report will be a key factor in determining if this "risk-positive, EUR-negative" theme can continue, but EUR-AUD downside option structures would benefit if it does."

Bank of America do however say they see the euro recovering come the end of 2012:

"We see the EUR strengthening toward year-end 2012 and next year. This assumes the Spanish sovereign does not need official funds; the Greek program proceeds, even with implementation problems; Italy avoids a crisis; and discussions for further Eurozone integration keep markets hopeful."

For now though analysts remain concerned about growth risks in the periphery that could lead to further ECB loosening.

Continued uncertainty about the ability of Greece to meet its program commitments and stay in the Eurozone is also a worry.

"Italy remains a concern as well because the recession has put this year’s deficit target at risk, while the reform agenda has been watered down, and political risks have come to the fore. The EU Summit at the end of June has actually done little to substantially mitigate these problems," says Bank of America.