Euro Exchange Rate Forecast
From my perspective, EURUSD could be staged for a continued decline over the coming days or weeks. According to the fundamental analysis, the euro exchange rates are expected to depreciate in the long-run. Although there was a short uptrend during last week, which was driven by yields, the investors worry more about deflation and the euro’s resilience.
What’s more, the ECB rates are highly expected to be cut after ECB’s policy meeting on Thursday. The market is expecting a 25bps reduction in the benchmark rate to 0.50% from the current 0.75%. During the last week, many weak economic data in the currency bloc has been reported including the weakest ZEW and PMI data from Germany. We think that a cut is likely and may weigh on the common currency in the week ahead. Of more concern is the transmission of monetary policy which remains impaired has been a key focus for the ECB. If the bank cannot announce targeted policy to provide support for periphery, this would likely weak the EUR. A. Fundamental Analysis 1. Balance of Payment Analysis
The following exhibits show that the Euro Area current account surplus has a greater growth rate than that of the US. It is the support for EUR appreciation. In April 19, the ECB published the Euro Area’s Balance of Payment data. The Euro area has 12.1 billion Euro surpluses in current account which is much higher than market expectation. | | 2. Purchasing power parity
Purchasing Power Parity determines exchange rates in the long term. Any change in the differential rate of inflation between them tends to be offset over the long run. According to the comparable PPP data from OECD, the European currency bloc has been suffering a decrease in the recent
Source: OECD (US=100)
According to the relative purchasing power parity analysis, the EUR/USD exchange rage has been over-valued for about 10 percent. In the long-run, the Euro dollar is expected to depreciate. (Data: IMF) | Exchange Rate | Relative Valuation
What’s more, the ECB rates are highly expected to be cut after ECB’s policy meeting on Thursday. The market is expecting a 25bps reduction in the benchmark rate to 0.50% from the current 0.75%. During the last week, many weak economic data in the currency bloc has been reported including the weakest ZEW and PMI data from Germany. We think that a cut is likely and may weigh on the common currency in the week ahead. Of more concern is the transmission of monetary policy which remains impaired has been a key focus for the ECB. If the bank cannot announce targeted policy to provide support for periphery, this would likely weak the EUR. A. Fundamental Analysis 1. Balance of Payment Analysis
The following exhibits show that the Euro Area current account surplus has a greater growth rate than that of the US. It is the support for EUR appreciation. In April 19, the ECB published the Euro Area’s Balance of Payment data. The Euro area has 12.1 billion Euro surpluses in current account which is much higher than market expectation. | | 2. Purchasing power parity
Purchasing Power Parity determines exchange rates in the long term. Any change in the differential rate of inflation between them tends to be offset over the long run. According to the comparable PPP data from OECD, the European currency bloc has been suffering a decrease in the recent
Source: OECD (US=100)
According to the relative purchasing power parity analysis, the EUR/USD exchange rage has been over-valued for about 10 percent. In the long-run, the Euro dollar is expected to depreciate. (Data: IMF) | Exchange Rate | Relative Valuation