Barclays raises forecasts for euro but warns bigger fall possible

The European Central Bank's disappointing 'forward guidance' meant the single currency would weaken more slowly in 2016, but in the end it might in fact fall even further than Barclays had originally been expecting, the broker told clients.

Barclays thus upped its forecasts for the euro/dollar exchange rate at the end of the first quarter of 2016 from 1.00 to 1.07, and from 0.98 to 1.03, from 0.95 to 0.98 for the successive two quarters.

At the end of 2016 Barclays still expected euro/dollar to be at 0.95. However, the broker now saw "downside risks" to its end of year forecast.

Despite the greater stability in the euro in the near-term Barclays expected the pound would depreciate in coming months, albeit less so.

The broker predicted that markets would focus on the UK-specific downside risks, including aggressive fiscal tightening and the looming referendum on membership of the European Union.

Barclays now saw cable - as traders refer to the exchange rate betweebn the pound and the US dollar - changing hands at 1.51 at the end of 2015, instead of the 1.45 they were predicting before.

By the end of the first quarter cable was seen at 1.47, up from their earlier prediction of 1.43.

The US dollar was seen gaining to 6.90 versus the Chinese yuan by the end of 2016.

"We continue to see policy as maintaining stability in the yuan's real effective exchange rate. As such, we have adjusted our near-term USDCNY forecasts higher," Barclays said.