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Forecast insights: Expect EUR to weaken in coming weeks warns investment bank

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Could we be in for a fresh bout of euro weakness?

Yes indeed, if you are to believe the analysts at London's Standard Chartered bank.

The well-respected exchange rate forecaster has called further euro weakness in the coming weeks.

According to Callum Henderson at the bank, "since the start of Q2, this EUR resilience has stalled and we expect it to reverse in coming weeks for three reasons."

The first reason is that flow drivers for EUR strength are no longer so supportive.

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"European banks continue to repatriate offshore balance sheet. However, EUR short covering on the IMM has stopped. Moreover, with oil prices moderating, EUR support from oil-related FX reserve diversification should decline," says Henderson.

The second reason, euro area-related event risk increases substantially in Q2 with the upcoming elections in France and Greece.

"Given the weak economic backdrop, we expect the ECB to cut rates again by 25bps in Q2," says the note from Standard Chartered.

Third, recent economic data out of China have been better than expected. We take the view that these have been distorted by seasonal factors.

"Nonetheless, they support our view that Chinese growth will bottom in Q1 and gradually re-accelerate in H2. These three factors should weigh on the EUR, both on the crosses and against the USD. Overall, we have an Underweight short-term (up to three months) FX rating on the EUR against key, trading-partner currencies and a Neutral medium-term (three to 12 months) FX rating," says the exchange rate forecast note.

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