The Euro may be poised to fall further in coming months after a bad few weeks when it has lost out against other major currencies, according to a report from an economic research unit.
A resurgent dollar could put further pressure on the Euro which has also declined against Sterling in recent weeks, according to the report from the Economic Research Unit at Bank of Ireland Global Markets.
Three years ago a Euro bought under 66 pence Sterling but by December 2008 the slide in the UK currency had brought that figure to 98 pence. Most studies show that Sterling is substantially undervalued against the Euro, with 75 pence seen as around fair value, the report says.
‘We have argued that Sterling is likely to appreciate from recent lows against the single currency over time. The decline in the Euro Sterling rate of late has seen it trade below 87 pence and although a short term Euro rally is possible we still feel that the 84 pence lows of last June are likely to be revisited by the middle of the year,’ says the report’s author Dan McLaughlin.
‘The Euro has also fallen against the Dollar, although again the current level, around $1.39, it is still substantially above the $1.15 to $1.20 range seen as fair value,’ he adds.
The Dollar’s appreciation may in part be due to the relative good performance of the US economy of late, with GDP in the final quarter of 2009 rising by 1.4% compared with just 0.2% estimated in the Euro area, according to McLaughlin.
‘The perception that continental Europe is underperforming the US is also evident in longer term interest rates, with the yield on 10 year US bonds rising sharply relative to German bonds over the past two months,’ he explains.
Investor concerns about the fiscal deficits of some of the Euro’s peripheral economies, notably Greece, have also played a part as has market positioning, with speculative traders now selling the Euro against the Dollar from being buyers of the Euro for most of 2009, he adds.
‘We believe that relative economic performance is a strong driver of currencies so, in the absence of acceleration in Euro growth relative to the US, the Euro may remain under downward pressure against a resurgent US Dollar. We have cut our forecast for the end of March to $1.35 from $1.40,’ McLaughlin reveals.
Sterling appreciated sharply against the Euro again in the middle of January. The UK currency had a fillip from the strong inflation numbers and moved from over £0.90 to the
single currency to around £0.8650 in a little more than a week’s worth of trading. Its
appreciation was halted, however, after fourth quarter GDP data was weaker than expected but it remained around £0.87 at the end of the month, the report also points out.
Sterling’s gains were also due, in part, to the current negative sentiment towards the Euro area due to worries over the Greek public finances. This meant that Sterling did not do as well against the Dollar as compared to the Euro last month. Sterling improved to $1.60 by the end of January having traded as low as $1.64 in the middle of the month.
However it was trading at under $1.59 at the end of December so it ended the first month of the year more or less as it started.