The euro dollar exchange rate is currently at 1.3625. The euro pound exchange rate is currently at 0.8596. The outlook for the euro is broadly negative say analysts at RBS who have released their latest exchange rate forecasts. Driving the euro forecasts are expectations concerning the debt situation in the eurozone which in turn tie into interest rate forecasts. "Although the policy rate was left unchanged as expected at 1.50%, Trichet and the ECB were dovish in last week’s September meeting, altering the assessment of inflation risks to “broadly balanced” from “upside” and noting that the risks to the economic outlook are now to the “downside” rather than “broadly balanced”. The 2011 and 2012 growth forecasts were downgraded," say RBS. RBS Economics continue to see a high (40%) probability of a 50bp rate cut by year-end, although their baseline case remains for rates to remain on hold until Q3:12. Euro-zone political tensions rose again last week amid possibility of a Greek default at the weekend, political tensions and concerns over the impact of weak growth on austerity plans. There is also the possibility that other countries now follow suit. RBS Rates Strategy see the potential for a hard Greek default around Dec-11. The German Constitutional Court last week ruled that German participation in Euro-zone bailouts is legal, but that any future bailout will require German parliamentary approval which could delay future bailouts. President Obama’s announcement of a larger than expected USD 450bn jobs plan was overshadowed by events in Eurozone. The G7 statement felt like an empty promise: a commitment to coordinated policy responses but without any new response.

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