Over the last six months the Euro to US Dollar exchange rate has fallen from a high of 1.2103 to a low of 1.0495. The pairing has since stabilised in the region of 1.1100, but industry experts are forecasting further losses for the common currency.
The EUR/USD downtrend was due to a number of factors, including the Swiss National Bank’s scrapping of its peg with the Euro, Federal Reserve interest rate hike speculation and the European Central Bank (ECB) rolling out a quantitative easing scheme in March. The US Dollar, meanwhile, fluctuated in response to mixed domestic data and global economic developments.
In recent weeks the turmoil in China culminated in the Black Monday market crash, an event which drove the Euro higher due to the unwinding of carry trades. The volatility and dimmer global outlook also saw investors revising their Fed rate hike expectations, a circumstance which helped the EUR/USD pair recover ground.
For much of the year the Fed’s September gathering was earmarked as being the one most likely to introduce the first revision of borrowing costs, but when that failed to materialise the Euro strengthened against its US peer, spiking to a high of 1.1455.
While Japan’s recent victory against South Africa in the Rugby World Cup was a complete surprise, the Federal Open Market Committee’s (FOMC) decision to leave interest rates on hold at the September gathering was less so, with expectations for an increase sitting at just 30% prior to the decision.
The policy statement accompanying the Fed announcement was moderately dovish in tone, with policymakers citing headwinds like the economic slowdown in China as justification for leaving borrowing costs at record lows. Some investors took the comments as a sign that the Fed is now unlikely to alter interest rates in 2015 at all and the US Dollar softened accordingly.
EUR/USD declines were limited however as speculation surrounding the European Central Bank’s (ECB) next policy move mounted. It is now widely expected that the central bank will expand its quantitative easing programme in order to stimulate price pressures and support economic growth in the currency bloc and if that proves to be the case a broadly weaker Euro is likely to be the result.
Analysts from BNP Paribas stated; ‘We expect more dovish communications, particularly in the context of persistently firm EUR, building up to an expansion of the QE programme at the December meeting. […] All-in-all, a dovish ECB […] should weigh on the EUR.’
Goldman Sachs have also offered a negative assessment of the Euro’s outlook, predicting that an upsizing of the ECB’s QE programme could see the Euro/US Dollar currency pair fall by as much as ten cents, with its twelve month EUR/USD projection sitting at 0.95.
Any declines in the EUR/USD exchange rate over the next few months would be exacerbated if the Fed looks to start raising borrowing costs before the close of 2015 or in the first quarter of 2016.
While data releases from both the Eurozone and US will continue to have a day-by-day impact on the Euro to US Dollar exchange rate, the six-month outlook for the pairing is neutral-negative, with the prospect of the exchange rate achieving fresh lows before the turn of the year.