The euro will rise to $1.20 by the end of next year as the European Central Bank finds itself unable to expand its quantitative easing stimulus as much as it would like, according to new forecasts from HSBC on Monday. This is an upward revision from the bank's previous end-2016 target of $1.10, which was already among the most bullish forecasts among big banks, many of whom expect the single currency to fall below parity with the dollar.
HSBC said in March it expected the euro to rise to $1.20, but only at some point during 2017. For its part, the US Federal Reserve will raise rates more slowly and gradually than is factored into market expectations, which will take the shine off the dollar's allure, HSBC said, "The (US) rate cycle - if it ever gets going - will be shallow and short. The ECB on the other side will not be able to be super dovish," David Bloom, global head of currency strategy at HSBC, wrote in a report on Monday.
"Once the market comes to terms with the lower and shorter cycle in the US coupled with the constraints on the ECB, euro/dollar will head upwards," he said. Bloom and his team expect the euro to end this year at $1.14, up from their previous forecast of $1.05 and more than 2 cents up from current levels of $1.1170. The Fed has so far held off raising interest rates this year - a move that would be its first increase since June 2006. As markets have pushed back the timing of "lift off", the dollar has lost some of its earlier gains.
The euro had fallen to a 12-year low of $1.0450 in March, which prompted many banks to call for a sub-parity move. But Bloom and his team went the other way, arguing that the bearishness was overdone and a pullback was on the cards. The euro did recover, briefly rising above $1.17 last month. But a growing consensus that the ECB will be forced to increase its 1 trillion QE programme beyond September next year to combat a renewed slump in inflation has since seen it fall back.
But QE is complicated for the ECB. It can only buy certain kinds of bonds with certain ratings, it is limited to buying a certain proportion of any given country's bonds, and negative yields rule out a large amount of bonds eligible for purchase. "These rules rule the ECB's policy. The ECB will find it extremely difficult to ignore or find a way around most of these constraints," HSBC said.