The euro’s fall seems to have stopped or at least paused for now. However, there are still a lot of pressures to the downside.
The team at Dankse provide detailed outlooks for both EUR/USD and EUR/JPY:
Here is their view, courtesy of eFXnews:
We are still very positive on the outlook for the American economy, where we expect economic growth rates to stay above trend for the whole of 2015. If we are right in our economic projection for H1, the unemployment level will reach 5.5% in June, which is close to the Fed’s own estimate for the long-term unemployment rate.
We expect the Fed to be sufficiently confident in the economic upswing in June and, consequently, raise the federal funds rate by 25bp from the historical low. We expect higher US rates to support a USD strengthening towards our 6M target of 1.10.
We expect the ECB’s significant monetary policy stimulus package to have a two-sided effect on the EUR. In the short term, we believe ECB QE will have a downward effect on eurozone rates, which will tend to weaken the single currency. In the longer term, the bond purchases should support an economic recovery in the eurozone, which would be a supportive factor for the EUR. For this reason, we expect EUR/USD to bottom in 6M time and gradually rebound towards a level of 1.12 in 12M.
Japanese data continue to surprise on the downside with the effects of the consumption tax hike weighing on domestic demand. However, fiscal headwinds are waning, past yen depreciation is supporting exports and the lower oil price is set to provide a boost to growth this year. Notably we are much more upbeat on GDP growth in Japan than consensus, looking for 1.2% y/y and 1.6% in 2015 and 2016, respectively.
Even though the Bank of Japan (BoJ) has been very aggressive on easing, it may be challenging to reach the 2% inflation target this year. Our baseline is that the BoJ will not do further easing, as headline inflation will get a boost from base effects later this year; also, it is worth noting that the October easing move was passed with only a small majority on the BoJ board. However, it is a close call, as downside risks to CPI growth loom if the oil price continues to fall from here.
We expect EUR/JPY to range trade in the coming months and target EUR/JPY at 136 in 1M, 3M and 6M. On a six- to 12-month horizon, we expect eurozone inflation expectations and the growth outlook to improve, which is expected to support the euro towards 14.
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