April in Paris could turn out cheaper

The latest poll of foreign exchange analysts for the Reuters news agency has predicted a fall in the value of the euro.

The British economy is seen as faring better than the euro zone's, growing 1.2 per cent this year and two per cent next, outstripping forecasts for 1.1 and 1.2 per cent growth respectively in the euro zone.

Against sterling, the euro is forecast to lose ground as the Bank of England is expected to strike a tighter attitude in the second quarter of next year, unwinding its loose monetary policy slightly sooner than the European Central Bank.

Cross rates calculated by Reuters show the euro trading at 83p in one month then dropping to 81p in six months where it will stay until next August at least.

That compares to respective 83p, 81p and 80p forecasts in a similar poll taken in July.

The latest poll, of around 60 analysts, was taken between Monday and Wednesday this week

Niels Christensen, of the analyst Nordea, said: "With the ECB and the BoE staying put way into 2011, it will continue to be a balancing act between the euro and sterling."

In the second half of last year the euro zone economy emerged from its worst post-war recession, and grew 0.2 percent in the first three months of 2010 but is expected to do little more than tick over in coming quarters.

The economy was boosted by ultra-loose fiscal policy from the European Central Bank but governments are now faced with the financial headache of having to slash budgets to recoup the cost of the bail-out while preventing a slide back into recession.

The euro is also expected to slide against the dollar. The analysts predicted that its recent rally against the dollar would soon reverse as fiscal tightening and weak economic growth plague the common currency.

The poll predicted the euro would be worth only $1.20 in a year's time –not far from the four-year lows of below $1.19 seen in June and well below Tuesday's three-month high of $1.3262.

Median forecasts predicted the common currency would trade at $1.30 in one month and $1.25 in three months, before falling to $1.24 in six months. Twelve-month forecasts were in a relatively wide range of $1.05-$1.38, highlighting uncertainty in the market.

This is the first time this year euro forecasts have been upgraded but is on the whole little changed from last month's poll, with analysts seeing the euro peaking at around $1.35 in the next few weeks before it begins to sink again.

Mr Christensen said: "The tougher fiscal tightening in Europe and dire growth outlook could soon bring headwinds to the euro. Hence, the current uptrend in eur/usd (euro/US dollar) should run out of momentum soon."

The United States economy bounced back more strongly and recent evidence of a stubbornly weak labour market and a cooling off in manufacturing and services business activity has done little to dent forecasts for 2.8 percent annual growth next year.

Raghav Subbarao, at Barclays Capital, said: "We don't believe the downside surprises in US economic data will continue. The euro should hold its levels and weaken from here on out."

The slow economic recovery of the euro zone and intensifying austerity measures mean the European Central Bank is not expected to raise rates from their record low of one per cent until the third quarter of 2011.

The US Federal Reserve is still expected to start raising rates early next year.

Euro volatility against the dollar was seen rising over the coming month. Analysts say the divergence of forecasts in Reuters currency polls offers a leading indicator of exchange rate volatility in the following month.

City tips

1 Reckitt Benckiser (lower risk) – Looking to aggressively expand the company, latest purchase being SSL International.

2 Compass (lower risk) – Trading update in line, worth adding to a portfolio.

3 Croda International (medium risk) – Results impressed and shares still look attractive.

4 International Power (medium risk) – Collaborations with the French could be on the cards.

5 Bowleven (higher risk) – Oil company with plenty of potential.

1 BP – Buying ahead of the new cap being fitted at the end of last week.

2 Connaught – Investors taking a brave gamble as to the survival of the company.

3 Lloyds Banking Group – Investors buying ahead of results.

4 Glaxo – Investors buying after recent weakness.

5 Barclays – Investors buying ahead of results.