Central Banks Could Affect Overvalued Euro

January 8th at 3:30pm by Max Chen

The euro exchange traded fund will begin to weaken, with some predicting a 6% decline in the Eurozone currency by the second quarter, as the Federal Reserve tapers while the European Central Bank sticks to its accommodative policy.

After the euro failed to rally beyond its $1.3812 resistance level on two occasions, analysts from Citigroup and Commerzbank AG are calling for a negative outlook on the currency, with Commerzbank predicting a fall to $1.2755 within three months, reports Neal Armstrong for Bloomberg.

According to median estimates of 50 analysts and economists, the euro is expected to slip 2% to $1.33 by the end of the first quarter and decline to $1.28 by the end of the year.

The euro is currently trading around $1.36.

“The pressure from the euro up-move is waning,” Karen Jones, Commerzbank’s head of foreign-exchange technical analysis, said in the article. “The long-term move that the euro has had since the middle of 2012 is likely coming to an end now.”

The Eurozone currency strengthened 4.2% against the dollar in 2013, its best annual performance since 2007.  The CurrencyShares Euro Trust (NYSEArca: FXE) is up 3.4% over the past year. [Shorting the Euro: Not 2013’s Best Idea]

The ECB will likely keep rates low as the region experiences slowing inflation. The consumer price inflation dipped to 0.8% in December, compared to the central bank’s 2% ceiling.

“December’s fall in euro-zone CPI inflation will add to concerns that the region could suffer from a bout of deflation and increase the pressure on the ECB to take more action to support the economy,” Ben May, European economist at Capital Economics Ltd., said in the article.

ETF investors interested in taking a more aggressive approach to the potential decline in the euro currency can utilize short and leveraged options, such as the ProShares UltraShort Euro ETF (NYSEArca: EUO), which tries to reflect twice the inverse daily performance of the euro, or the ProShares Short Euro ETF (NYSEArca: EUFX), which tries to reflect the inverse daily performance of the euro. Due to compounding effects of daily returns, the funds may not perfectly reflect the target return for extended periods.

CurrencyShares Euro Trust

For more information on the euro currency, visit our euro category.

Max Chen contributed to this article.