The euro will rebound from its worst start to a year since 2015 to gain over the coming 12 months, according to a Reuters poll of analysts, although they warned that risks to that view were skewed to the downside.
Having lost nearly 4.5 percent against the dollar in 2018, the euro has not fared any better so far this year, falling more than 2 percent in January-March - its worst first-quarter performance in four years.
That was mostly driven by weak growth and inflation prospects for the region, which pushed the European Central Bank to rule out any rate hikes this year and announce new long-term cheap loans, known as TLTROs. But the poll of more than 75 currency analysts taken this week showed the euro will reverse that trend and gain about 5 percent in a year, to $1.18 from around $1.12 on Thursday.
The single currency began to rise at the start of April on news that talks on trade between the United States and China appeared to be making headway. "While Europe remains impacted by external trade concerns, assuming an easing in China-US trade tensions into H2 and a resulting turn in external data, we look for a stronger medium-run euro profile," said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.
"The introduction of fresh TLTROs helps to alleviate a potential cliff in funding costs for euro zone banks, while increased fiscal stimulus will also be supportive for the euro." Economic data out of the euro zone in recent weeks has given few reasons to be optimistic, but the US economy is also experiencing a slowdown, which has forced the Federal Reserve to make a U-turn on policy.
The Fed's "dot plot" projections now suggest no hikes in 2019 compared with two predicted in December, with economists in a separate Reuters poll ruling out any tightening next year too. "We don't expect the ECB to be dynamic when it comes to interest rate hikes. But we see an end to interest rate hikes in the US, so the momentum will turn sometime in the future ... in favour of the euro," said Dekabank economist Christian Melzer.
This survey marks the 20th consecutive poll in which analysts have predicted the euro will gain over the 12-month forecast horizon, but during that period it has lost close to 5 percent against the dollar. The latest consensus was the lowest since a poll in September 2017 and the range of forecasts showed lower lows for the single currency for the second survey in a row.
Over 65 percent of analysts who answered an extra question said the risk to their euro forecasts for the coming year was skewed more to the downside. "There may be a little bit more downside to go on the euro to reflect the weakness of the euro zone economy, the impact of political uncertainty also the more dovish bias of the ECB," said Jane Foley, head of FX strategy at Rabobank.
However, analysts were less clear about the dollar. Respondents were split right down the middle when asked if the risk to their dollar forecasts was skewed more to the upside or downside. "There's nothing like as much gloom, yet, about the US as there is about Europe, so no wonder the euro is anchored firmly to the bottom of its trading range," said Kit Juckes, global head of FX strategy at Societe Generale.
"If you're a US economic pessimist who wants to be a dollar bear, my best recommendation is that you go back into hibernation for a little longer!" Although most major economies are expected to experience a protracted economic slowdown, the United States is likely to be relatively stable, which should keep the dollar in play. "We are in the battle of uglies now when it comes to fundamentals and the dollar is probably just the least ugly." said Rabobank's Foley.
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