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Friday, 24th May 2024
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Third quarter on currencies and bonds Back  
At the beginningof each quarter, Finance invites bond and currency market experts to give their outlook for the quarter and to predict the level of key indicators at the quarter end. Following on from last quarter’s predictions the analysts who gave predictions comment on their accuracy. The third quarter of this year began in July and will end on Friday 29th September. The following are the assessments for the current quarter.
Euro takes a breather

Geraldine Concagh,
Economist, AIB Group Treasury

EUR/USD: 0.98
EUR/GBP: 0.64
EUR/JPY: 103.00
USD/JPY 105.00

Looking back: Weaker than expected economic data in the UK resulted in a scaling back of interest rate expectations there and hence a better than expected improvement in the EUR/GBP rate. The euro achieved much of its expected upward potential against the dollar but momentum beyond $0.95 was limited by the realisation that, although conditions in the eurozone are improving, the US economy continued to outperform. As expected, the yen traded in relatively narrow ranges against the dollar as markets deliberated over the uncertain state of the Japanese economy.

Looking forward: Heading into the summer period and reduced activity, currencies could be subject to erratic movements. For the most part however, the euro should trade in a $0.94-0.98 range against the dollar, supported by the pick-up in the main eurozone economies and expectations of further tightening from the ECB. The outlook on US rates is less uncertain at this stage as it is too early to determine that the economy has indeed slowed down. With UK rates at, or very close to their peak, the euro should establish further gains against sterling.

The yen will be supported by speculation that the BoJ is set to end its zero interest rate policy.

Phelim Keogan, Chief Dealer, National Irish Bank Treasury

EUR/USD: 1.02
EUR/GBP: 0.67
EUR/JPY: 112
USD/JPY: 110

Comment: Although current Euro levels are broadly in line with those prevailing at the beginning of the quarter, an interesting story has unfolded over the period; the euro’s decline accelerated in April, briefly dipping below 0.89 to the dollar during May. But what began as a pre-holiday weekend short-covering rally by the euro quickly developed into a recovery of some 10% as U.S. employment data suggested an abrupt slowdown in the U.S. economy. Since then the euro has consolidated in tight ranges as the market awaits additional evidence of stronger growth in Europe and slower conditions in the States.

All the signs are that the euro is finally over the worst, and one can expect further consolidation in tight ranges during the summer lull (E/$ 0.93-0.97; E/? 0.6150-0.6450; E/Y 97/105). However, this may prove to be just a pause in a larger Euro recovery as growth rates become more balanced across the globe. We may avoid interest rate rises on both sides of the Atlantic during Q3, but we can expect an end to the Japanese zero-interest rate policy. Nonetheless, the Dollar / Yen is likely to remain range-bound, finding support below 100 on any dips.

Aziz McMahon, Treasury Economist, Ulster Bank Capital Markets

EUR/USD: 0.95
EUR/GBP: 0.65
EUR/JPY: 100
USD/JPY: 105

Comment: As Keynes once said “Gentlemen, when the facts change I change my view”. Economic fundamentals have shifted enough in the second quarter of 2000 to believe that, having plunged sharply lower in the interim, EUR/USD has stabilised. The US stock market has levelled off, US growth appears to be slowing and inflation may be accelerating. Against a background of accelerating euro zone growth, the strong dollar story is less convincing. Nevertheless, we are reluctant to write the greenback off just yet, so, we see EUR/USD trading around 0.95 until end Q3. Sterling is likely to weaken taking EUR/GBP to 0.65. Like EUR/USD, EUR/JPY should oscillate around 100.

Eddie Murphy, Vice President, Treasury Citibank NA

EUR/USD: 0.95
GBP/EUR: 0.635
EUR/JPY: 100.00
USD/JPY: 105.00

Looking back: We correctly anticipated yen and sterling softness - sterling on valuation grounds and the yen because the Japanese economy does not need yen-strength.

This put us on the correct side of EUR-JPY, although by less than we expected. Our EUR-USD forecast was too optimistic, as rate fears in the US outweighed good euro area economic news and rising ECB rate expectations.

Looking forward: We expect the US economy to experience a last surge of demand over the summer that will raise expectations of further Fed tightening and slow the euro’s rise. Hence, while we see the euro breaking parity within a year, the dollar may yet have a few innings in coming months. We view these moments of euro weakness as buying opportunities. The ECB will remain hawkish and will have moved a further 25bps by end-September, while signalling further hikes down the road. Sterling’s prospects remain weak versus the euro as election season rolls near, amid signs of manufacturing weakness. The end of zero rates is unlikely to induce as much yen strength as the market expects.

James Jordan, Bank of America, Foreign Exchange Sales and Trading

EUR/USD: 1.01
EUR/GBP: 0.66
EUR/JPY: 97.0
USD/JPY: 96.0

Comments: EUR/USD achieved my 0.8900 target a bit earlier than expected, however, we formed a double bottom basing pattern at the level which has led to a strong rebound. This rally has taken out some key resistance levels on the way up and more than likely points to an end of the long term downtrend. Look for further gains therefore from here with the psychological parity level targeted next.

EUR/GBP also made an early test towards the 0.5600 target, spiking to a 0.5685 low before rebounding. The good strong rally from there has taken out some key longer term resistance levels which has removed the downside risk and opens up further gains now towards 0.6600 and 0.6735

EUR/JPY - downside momentum ran out of steam under the 96.00 target and we recovered. Further short term gains possible before we resume the longer term downtrend.

USD/JPY - Lack of any sustained recovery keeps us mindful of the longer term downtrend. We look for the 8 month long 101-112 consolidation phase to eventually resolve lower and open up a test towards initial target of 96.00.

Laura O’Shea, Economic Research Unit Bank of Ireland Group Treasury

EUR/USD: 0.97
EUR/STG: 0.65
EUR/JPY: 102
USD/JPY: 108

Comment: The euro’s dramatic fall in late Aprilearly May surprised most market forecasters. However, the euro now seems to have recently established itself in a recovery phase and a return to the lows of $0.8840 seems unlikely. We see clear potential for the currency to target $0.97 by the end of Q3.

UK interest rate expectations have been downscaled considerably. The MPC has left rates unchanged since February, concerned about the effect of strong sterling on the export industry and consoled by softer inflation and consumer activity data. During Q3, European interest rates look set to rise more than UK rates and the narrowing differential should benefit the euro.

The dollar has remained strong throughout Q2. The US economy, while moderating in the speed of its GDP and consumer sector growth, is still the source of exceptional economic, technological and business developments and major dollar weakness is not envisaged amid continued US capital inflows.

Positive signals have been emerging on the Japanese economy. Interest rates may be raised during Q3, which would boost the yen in the short term. However, for a more far-reaching recovery, and thus comparable interest rates with other industrialised nations, domestic demand still needs to strengthen and we feel that this may not begin in earnest until next year.

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