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Euro / Dollar Now Headed for 1.19-1.20 says Barclays
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Euro / Dollar Now Headed for 1.19-1.20 says Barclays
Mar 22, 2024 2:17 AM

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The Euro will "grind higher" against the Dollar over coming weeks shows analysis from Barclays.

The call comes as analysts at the lender's investment banking division reassess the Euro's outlook in the wake of the European Central Bank's February policy update, which ultimately prepared markets for interest rate hikes over coming months.

"The ECB President failed to rule out a 2022 rate hike, instead emphasising that at the March meeting the bank would be in a better position to make policy decisions," says Marek Raczko, a strategist at Barclays.

The ECB's entertainment of a 2022 rate hike boosted the Euro and Eurozone bond yields in early February, although the economist community is now debating whether a rate hike will be delivered in December or March.

Money market pricing is meanwhile showing investors to be buying into more than one hike in 2022 as the front-end of the euro curve is now pricing up to 50 basis points of hikes this year.

This would imply two 25 basis points of hikes, suggesting a rapid winding down of the ECB's quantitative easing programme, known as the Asset Purchase Programme (APP), if such hikes are to be squeezed in before the turn of the year.

In response to the ECB's policy swivel, Barclays has revised its ECB forecast, calling for a March announcement of a faster tapering of asset purchases and 25bp rate hikes in both March and September 2023.

The predictions are therefore somewhat at odds with the market's pricing and implies some downside adjustment in the Euro if correct.

Above: Is the bottom now in for EUR/USD?

EUR/USD reference rates at publication:

Spot: 1.1400High street bank rates (indicative band): 1.1000-1.1085Payment specialist rates (indicative band): 1.1300-1.1350Find out more about market-beating rates and service, hereSet up an exchange rate alert, hereNevertheless, Barclays says the ECB's shift from monetary policy divergence to monetary policy convergence is significant.

"The EUR faces a grind higher over the coming weeks as the FX markets adjust," says Raczko.

The Euro to Dollar exchange rate depreciated 8% from start-2021 until end-January 2022 as markets priced in a rapid series of rate hikes at the Federal Reserve and very little from the ECB.

Indeed the currency fell 6% in real effective exchange rate terms, as the ECB emphasised that it would lag its G10 peers in normalising policy.

"This was reflected in market positioning with speculative investors consistently reducing their net EUR long holding from August 2020 until November 2021. Now, FX markets must adjust to the prospect of higher eurozone rates," says Raczko.

Barclays says they hold a EUR/USD forecast of 1.19 by end-2019.

"EUR can also gain support from rates markets marking up their expectations of the ECB terminal rate. 2Y OIS suggests an ECB rate of only 0.5%," adds Raczko.

For the terminal rate - or the end point of the hiking cycle - to lift it must become clear that Eurozone inflation will stick above 2.0% for a longer-than-expected time frame.

Key to whether this will transpire will be the speed at which inflation drops off over the course of 2022 and to what extent core inflation readings remain stubbornly high.

The next Eurozone inflation release is due on March 02.

Strategist Eimar Daly at Barclays said on February 08 her team were to initiate a medium-term long EUR/USD trade, targeting a rise to 1.20.

"Our trade is premised on the ECB’s hawkish pivot, a global equities rotation favouring the eurozone over the US, growth differentials and positioning," said Daly.

Above: "ECB plays catch up to the Fed, narrowing the rate differential" - Barclays.

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