Euro, sterling expected to hold firm over coming months: Reuters poll

BANGALORE Wed Jul 2, 2014 7:17pm IST

Euro coins are seen in this photo illustration taken in Rome, December 9, 2011.  REUTERS/Tony Gentile

Euro coins are seen in this photo illustration taken in Rome, December 9, 2011.

Credit: Reuters/Tony Gentile

BANGALORE (Reuters) - The euro will hold its strength for at least a few more months, but a U.S. dollar rally, which analysts and investors have been waiting on for many months, will begin later this year, a Reuters poll found.

The European Central Bank, which already took a variety of steps last month to counter a threat of deflation, is expected to only give more details on those policies at its meeting on Thursday.

The poll of over 60 strategists this week showed the euro at around the current level of $1.36 in one month, $1.34 in three months and weakening below $1.30 only in a year.

That consensus is almost the same as the June poll, which was down roughly in line with the actual fall in the currency in May after ECB President Mario Draghi signaled monetary policy would ease in June.

Camilla Sutton, chief FX strategist at Scotia Capital, noted that the euro spent all of June within the range it traded in on the day of the ECB's last meeting -- despite a buildup of bets against the currency in the meantime.

"Flows into Europe from FX reserve managers are likely to prove an ongoing offset to the building of near-term short positions," she said.

In fact, speculators reduced those short positions in the latest week, according the Commodity Futures Trading Commission, leaving it trading at $1.3647 on Wednesday, at the upper end of the range from the day of last month's policy meeting.

While there is evidence that inflation in the U.S. may be turning against the backdrop of higher energy costs globally, it is not expected to pick up in the euro zone anytime soon.

Indeed, the ECB's own staff projects inflation at a mere 0.7 percent for this year and do not expect it to reach its target of close to but below 2 percent at least until 2017.

Those expectations of low inflation for a prolonged period has pushed several analysts to lower euro/dollar forecasts in the coming year. Goldman Sachs, for example, cut its forecasts to $1.30 in a year from $1.40 just three months ago.

DOLLAR RESURGENT?

After the United States economy got off to a dismal start this year, the dollar is expected to gain against major currencies in the coming year as growth picks up and with it, perhaps, inflation.

While it is in no hurry to do so, the Federal Reserve will eventually raise interest rates from record lows next year, probably in the second half. But it will be years before the ECB does the same, which should start to weigh on the euro. [ECILT/US]

Britain's economy is doing even better than the U.S., and its central bank, too, will have to raise interest rates from record lows. That will come possibly later this year, but more likely in 2015, according to a recent Reuters poll. [ECILT/GB]

The pound, which rallied to $1.7167 on Tuesday, its highest since October 2008, was last trading at $1.7163. Most of the Bank of England's upcoming work is already priced into the currency.

Sterling is expected to gain against the euro in the coming year after rising almost 4 percent this year. One euro is expected to fetch 80 pence in a month, 78 pence in six and just 77 in a year, a stronger pound view than in June.

Against the dollar, the consensus view has the pound trading lower at $1.67 in a year, but a majority of the common contributors in the latest poll raised their cable forecast from last month.

Colin Asher, senior economist at Mizuho Corporate Bank, who expects a rate hike this year, says the pound will rally to $1.76 in the next 12 months, a forecast he says is "conservative."

(For other stories from the poll see)

(Polling and analysis by Swati Chaturvedi and Siddharth Iyer; Editing by Larry King)

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