The euro already reflects the likelihood of an ECB asset-purchase programme, according to currency strategists polled by Reuters, but it will probably continue to fall in the year ahead as a US dollar rally gathers pace. The euro has weakened around 1 percent since ECB President Mario Draghi dropped a heavy hint on August 22 at Jackson Hole that he was prepared to print money and support relaxing fiscal policy to avoid deflation and another recession in the region.
That set the stage for speculation the ECB would soon launch a quantitative easing (QE) programme, following its peers in Britain, Japan and the United States. With a negative deposit rate, the ECB has no more room to cut interest rates. Twenty-four of 33 analysts in the survey conducted this week said a move to begin QE was already priced in, indicating the euro may not fall much more than it already has once an announcement is actually made.
"A lot of the impact of QE comes pre-announcement and an asset-backed securities programme is, in my view, fully priced in," said Derek Halpenny, European head of market research at BTMU in London. He added the probability of the ECB buying sovereign debt, as opposed to its widely discussed plans to deepen an ABS market in Europe from which it can make purchases, is only partly reflected in the current euro exchange rate.
A Reuters poll of economists last week gave a median 75 percent chance the ECB would launch QE by March, buying asset-backed securities. In contrast, economists saw only a 40 percent likelihood of sovereign bond purchases. Still, a rally in the US dollar as America's economy recovers more quickly is likely to weaken the euro to $1.31 by the end of September from $1.315 on Wednesday.
It is then expected to fall to $1.30 by November and to $1.26 in a year, according to the median consensus from 58 analysts. Those latest forecasts are markedly more bearish than the predictions in the August survey. They should be welcomed by policymakers, who are seeking to get inflation to rise from a dangerously low 0.3 percent. A weaker euro raises the price of imported goods and services.
Pessimism about the euro is also reflected in the positions currency speculators have taken in futures markets. Traders have piled up almost four short positions for every long position - the most bearish since June 2012 - according to data from the Commodities and Futures Trading Commission. Currency markets are not alone in front-running the ECB. Ten-year German bond yields fell 26 basis points in August as investors poured into safe-haven debt. Weak economic data had pointed to faltering growth and growing risks of deflation, stoking speculation of an ECB stimulus programme.
While depressed yields are good for raising cheap funds, the current sub-1 percent return in German bunds means there may be no further fall even if the ECB prints money. "I would broadly agree with the view that bond yields, post QE, would probably rise, like in the case of the US," Halpenny added. The US dollar is also driving the euro exchange rate's descent. A long-anticipated rally is taking hold after a raft of data over the past months showed the world's largest economy is gaining traction. That should keep the Fed on track to end its stimulus next month. Economists polled by Reuters expect the first interest rate hike in Q2 2015, although much depends on the pace at which wages rise.
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