The latest poll of the world’s leading foreign exchange forecasters gives us a credible insight into where the euro is headed against the dollar over coming months.
The Reuters Smart Estimate for the euro/dollar’s outlook is out and it give us a view of where the currency pair is likely to trade in one month, three months, six months and through to 2017.
We find the data to be incredibly useful as it brings together the estimates of all the leading forecaster institutions.
The Smart Estimate is also useful in that it gives greater weighting to those forecasters who have a track record of accuracy.
The latest data covering the second quarter of 2016 comes as the euro to dollar exchange rate trends higher.
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The average EUR/USD price in January was at 1.0865, rising to an average of 1.1104 in March.
The average price for March was 1.1127. A look at the charts shows us that the currency pair still remains caught in a sideways trend that looks unlikely to break anytime soon.
Do the big brains at the world’s leading investment banks think this range will break anytime soon?
Some do; Morgan Stanley see the EUR/USD falling to 0.98 in a year’s time while HSBC see the rate heading to 1.20 come 2017.
Some analysts like those at Spain's BBVA think that in a year’s time we will be where we are now.
“Predicting currency movements is not an exact science. Forecasts from major financial institutions for the EUR/USD rate vary dramatically, with a predicted median of €1/$1.0800 in twelve months’ time.There is also a marked difference between the minimum rate of €1/$0.9500 and maximum rate of €1/$1.220 listed by the banks,” say Carl Hasty at Smart Currency Business in response to the results.
This means that for every $1 million changed to euro, you could be over €230,000 better or worse off.
The median expectation is for the pair to be at 1.08 in a year’s time, 1.09 in six months, 1.19 in three months and 1.12 in one month.
Looking at the Reuters Smart Estimate, which weighs the most accurate forecasters more heavily, we see the euro-dollar at 1.0649 this time next year.
In six months the estimate is seeing 1.0945, in three months 1.1037 and in one month 1.1252.
How Accurate Are Forecasts?
Forecasts are useful tools for providing an estimate of where exchange rates might end up, all else being equal.
“In reality, however, forecasts can vary among financial institutions, and new and existing external events have the power to change the course of a currency’s performance,” say Smart Currency’s Carl Hasty.
To compare, the January Reuters Smart Estimate® forecast suggested a EUR/USD rate of €1/$1.0600 in three months’ time, around the end of March.
The EUR/USD mid-market rate on 31st March 2016 was €1/$1.1389. This means a variance of over €60,000 for every $1 million changed to euro.
“This is why it is crucial that you have a suitable hedging strategy in place, to minimise your losses on fluctuating currency exchange rates,” says Hasty.