Looking Ahead To 2015: Stronger EUR/USD
Growth Aces | Dec 31, 2014 05:59AM ET
- The USD ends 2014 with a gain of more than 12% against a basket of major currencies. It was the largest gain of the USD since 2005.
- As expectations strengthen that the European Central Bank will ease monetary policy more aggressively, some economists predict the EUR could even slide to parity with the USD by the end of 2015. Forecasts of GrowthAces.com have an opposite direction.
- The baseline scenario on the market is that the ECB will move on to quantitative easing next year by buying government bonds. Moreover, the U.S. economy is widely expected to grow strongly in 2015, prompting the Federal Reserve to start raising rates. The contrast between the U.S. Federal Reserve's path toward rises in interest rates next year and stimulative monetary policy in the eurozone was the main factor supporting the EUR/USD fall in 2014. All these factors are already priced in the EUR/USD rate
- In our opinion the divergence in monetary policies will play an important role still in the first quarter 2015, but then the EUR is likely to appreciate against the USD and other major currencies. We should note that a slowdown in China's economy could undermine the U.S. economic recovery and weigh on the USD. Moreover, further strong gains of the USD may help dissuade the Fed from raising rates. On the other hand, the EUR would remain fundamentally strong, helped by the eurozone's current account surplus and recovering economy.
- The EUR is likely to be stronger against "safe-havens": JPY and CHF. The Bank of Japan recently expanded its own programme to stimulate the domestic economy, while the Swiss National Bank has promised for the past three years to cap the CHF at 1.20 per EUR. Earlier this month, the SNB also said it would start charging banks for deposits in CHF, hoping to ease upwards pressure on the currency. In our opinion the EUR may also appreciate slightly against the GBP next year as Britain's economy is losing momentum and facing its most uncertain parliamentary election in decades in May.
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