EUR/USD: 1.37 in 1 month and 1.38 in 3 months

Geoffrey Yu, Senior FX Strategist, on the Euro zone

According to ZEW President Professor Clemens Fuest, Germany has recently experienced a slight dent in economic activity– retail sales declined and industrial production as well as incoming orders dropped; nonetheless, the medium-term economic outlook remains favourable. Taking all into account, how strong is Europe’s biggest economy and what can we expect in the future?

Leading indicators in Germany have certainly come off somewhat and other officials have indeed started to voice concern. Nonetheless, we have to bear in mind that real incomes in Germany are being artificially suppressed by wage restraint, which itself is a source of the Euro zone's imbalances. While German exports may suffer from external disruptions, over the longer term the internal adjustments matter far more for the Euro zone's sustainability and gradual optimisation.

Recently the ECB president Mario Draghi discussed its newest stimulus tool, that is expected to hand banks more than 700 billion Euros of cheap funding. To your mind how effective it will be and how effective has been previous funding round which started in 2011?

We do not believe the TLTROs (targeted longer-term refinancing operations) will be as effective. 700 billion Euro is clearly an aggressive estimate but the problem is that the Eurozone lacks credit demand at this point due to weak growth prospects. Our economists believe that the TLTROs will be used as an attractive source of funding; however, we do question the actual economic benefits. Of course, outright Quantitative Easing is a different story; although, that is still a long way off.

What do you expect to be the most important drivers for the European shared currency this year and also at the beginning of the upcoming year?

In our opinion, the main drivers likely exist outside the Euro zone rather than within the area. Our longer term forecasts for a weaker Euro is contingent upon higher U.S. rates and the Fed normalisation. We believe this is a much important driver as a combination of rate differentials and redirection of capital flows stand to benefit the U.S. far more than other economies.

What are your forecasts for the EUR/USD and EUR/JPY in a short run (1-3 months) and in a longer term?

EUR/USD: 1.37 in 1 month and 1.38 in 3 months.

EUR/JPY: 141 in 1 month and 145 in 3 months.