Some promising economic data and hopes Greece will yet avoid a damaging sovereign debt default helped push the euro around 3.5% higher since Jan 16 to around $1.31 yesterday.
But strategists were pessimistic about the quality of the rally, suggesting the euro will revert to its longer-term trend of modest depreciation against the dollar since hitting $1.49 a year ago.
“Mostly, we just don’t believe this risk rally is for real,” said Ned Rumpeltin, of Standard Chartered Bank.
“The market came back from its holidays, realised economic data is doing okay on the sentiment side. On the hard data side, it’s a little bit softer. There’s an illusion of progress.”
Mr Rumpeltin described the recent rally as “low quality”, with a lot of short covering. The US Commodity Futures Trading Commission provided further indications the euro rally will prove short lived, with data last week showing investors upped bets in favour of the dollar.
The poll showed the euro weakening a little to around $1.29 in a month’s time, $1.27 in three months, and $1.25 in six, before returning to $1.28 in a year’s time — roughly a cent or two lower in each case compared with forecasts from the January poll, the lowest since Sept 2010.
As in previous polls, analysts were reluctant to forecast major moves in either direction for the euro while they await concrete news on a resolution of the eurozone debt crisis, or a marked deterioration. “We’re looking at a generally frustrated range trading environment as we wait for more developments to accumulate,” said Mr Rumpeltin.
Athens has almost wrapped up a deal with its creditors to cut its debt mountain, but the government is now racing to complete talks for a €130bn bailout with the IMF.
Portugal too has come under the debt crisis spotlight again, with markets increasingly of the opinion that it will need a second bailout to avoid bankruptcy.
With so much at stake in both scenarios, the tone among poll respondents was “wait-and-see”.
The ECB looks set to cut interest rates to a new record low 0.75% next month, bringing it more in line with its US, British and Japanese peers.
With interest rate differentials a moot point, focus will turn to economic growth prospects, which look a little better in the US than in Europe.
The outlook against Sterling looks flat. It will cruise at current levels against the battered euro despite growing optimism about the British economy’s ability to outperform the eurozone, a Reuters poll found.