Euro continues to remain fairly well supported, despite the low economic policy in the area

Michael Hewson, Market Analyst, on the Euro

According to the announcement made on the 7th of August, Russia has banned certain food imports in response to the sanctions of the crisis in Ukraine. Since Russia is Europe’s second largest market for food and drinks, what could be the impact on Europe and the Euro currency? How crucial could it be long-term?

In terms of effects on the EU economy it is probably not going to be very positive. The reason for that is the large trade volumes between two blocks. However, it is not going to affect the Euro currency as much, simply because the Euro continues to remain fairly well supported, despite the low economic policy in the Euro area. That is largely down to expectation that the ECB will not take any further steps to ease monetary policy until such times, as the TLTRO program (which is due to start in November) will be unable to assess the effects of that.

Furthermore, weaker US economic data could push out the likelihood of the Federal Reserve interest rate hike further in 2015, and that is going to weaken the Dollar to a certain extent. Unless the Euro drops below 1.33, the lowest for the past few weeks, than we will likely be trading between 1.33 and 1.36 for the EUR/USD.

What factors should be considered as the core drivers for the Euro?

Basically, it is the expectations of future monetary policy with respect to the ECB and the Federal Reserve. We have seen a very weak US retail sales number for July, which means the Fed is likely to maintain an easier monetary policy for a longer period of time. There was an anticipation that once the Fed is finished tapering their asset purchases (due to finish in October), a rate hike could come fairly soon afterwards. Given the weaknes of the data we have seen over the past couple of days, the likelihood of the rate hike from the Fed for the first half of 2015 is slightly resided. Moreover, looking at terms of further actions from the ECB between now and the end of the year will also remain unlikely. The fact is that we have come down from 1.40 to 1.33, so the Euro is probably going to have a little bit of rebound. However, we could get a move back towards 1.35, 1.36.

What are your expectations on EUR/USD, EUR/AUD and EUR/JPY for the next two- three months?

As already mentioned, EUR/USD 1.33-1.36 is the extend of any move there. The EUR/AUD currency pair should find support around at 1.42, 1.46 on the upside. Talking about the EUR/JPY, iy may fluctuate between 1.35- 1.38.