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Forex pairs in this Article » EUR/USD
FXstreet.com (Córdoba) - Last week, the ECB surprised the majority of market participants with a rate cut and the euro reacted with notable losses. However, according to Ulrich Leuchtmann, analyst at Commerzbank that is likely to have been it, as far as euro weakness is concerned, as the ECB's scope for action is limited to the downside.

Key Quotes

"The ECB's surprise move has not caused us to change our EUR/USD outlook. We continue to expect a EUR/USD exchange rate of 1.35 at year-end".

"Why? The surprise rate cut was caused by unexpectedly low inflation. In principle low inflation is good news for a currency: if the internal value of a currency is eroded less quickly the same should apply for its external value. So we have two opposing effects: low interest rates and a low inflation rate. The real interest rate (the difference between the two) combines these effects".

"The ECB might react to that with further rate cuts (including negative deposit rates). However, it will only be able to react to low inflation over-proportionately – as its scope is limited to the downside".

"So in the end lower inflation and lower interest rates would not be negative for the euro; it is likely to recover by year-end".

"We have even raised our EUR-USD forecast for year-end 2014 as the Fed might wait longer before considering rate hikes. It seems increasingly questionable that rates hikes will be on the horizon in late 2014 thus supporting the dollar. As a result increased USD appreciation in late 2014 is no longer our main scenario".
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