Despite surge, the euro's still a sell: Analysts
The euro may have surged two percent on Tuesday, but analysts expect the single currency will resume its downward march amid a likely volatile week.
"Higher inflation in the Eurozone and signs of a resolution to the Greece crisis has put the euro under short covering pressure," Gregg Gibbs, head of Asia Pacific markets strategy at RBS, told CNBC in a phone interview. Gibbs sees a volatile week ahead for the single currency, but he expects the euro to start falling again and to "hit new lows of below 1.05 against the U.S. dollar by the end of 2015."
The euro has faced heavy selling pressure for a year, as anemic inflation numbers increased anticipation the European Central Bank (ECB) would launch a massive quantitative easing program. The ECB obliged in January this year, with bond purchases of 60 billion euro (around $67 billion) a month.
But on Tuesday, one day ahead of the ECB's policy meeting, the euro reversed course.
Investors scrambled to buy back the euro, spooked by news that Greece's creditors could present Athens with a "take it or leave it" deal this week and by signs the Eurozone may be putting the threat of deflation behind it. In May, consumer prices rose for the first time in six months, by 0.3 percent on-year, although that's still a long way off the ECB's two percent target.
The euro promptly jumped two percent against the U.S. dollar on the day and was fetching $1.115 in mid-day Asian trading Wednesday. The common currency is still down around 18.62 percent against the greenback over the past year.
But analysts still believe the euro's depreciation against the U.S. dollar is inevitable.
For one, inflation may not truly recover.
"Core inflation in the Euro area was trending down long before the drop in oil prices," Goldman Sachs said in a note late Tuesday. "Core inflation is likely to stay near current levels in coming months... and this should see the euro weaken against the U.S. dollar," the bank said.
Goldman is forecasting the euro will fall to $0.95 in a year's time and to $0.80 by 2017.
Volatility to persist
The long term trend may be to the downside, but investors will have plenty of data and news to chew on Wednesday.
"The next 24 hours is extremely important for the euro," Kathy Lien, BK Asset Management managing director, said in a note on Wednesday.
The ECB is not expected to change monetary policy at its meeting later, "but the tone of (ECB President) Mario Draghi's press conference could have a significant impact on the currency. If he is optimistic, the euro will break $1.12, but if he is cautious and concerned about downside risks, the currency will shed its gains quickly," she said.
Greek drama isn't over
Beyond the next 24 hours, Greece is facing a series of payments in June and July, with the big showdown coming on July 19, when the biggest repayment, of 3.8 billion euros, will fall due. Each deadline could face its own showdown.
In addition, focus is likely to return to U.S. economic data, ahead of the anticipated rate hike by the U.S. Federal Reserve, putting more pressure on the euro, analysts said. Higher interest rates in the U.S. make assets there more attractive compared with European assets.
"Risk reward as tilted in favor of a lower euro, given our expectation for U.S. data to pick up. In fact, we think the hurdle to go through $1.05 is relatively low in coming weeks," Goldman said.
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