Euro to Dollar Week Ahead Forecast: EUR/USD Holds Above Support

January 14, 2024 - Written by David Woodsmith

STORY LINK Euro to Dollar Week Ahead Forecast: EUR/USD Holds Above Support

The dollar was unable to hold gains on Thursday despite the stronger-than-expected inflation data and also lost ground on Friday despite significant geo-political developments.

The Euro to Dollar (EUR/USD) exchange rate found support below 1.0950 on Friday and was held in tight ranges with slight net gains to 1.0975, but no attack on the 1.1000 level.

There has been a sharp move in US 2-year yields with a slide to 4.13% from highs near 4.40% immediately after Thursday’s inflation data.

Lower yields sapped dollar support with USD/JPY under pressure.

Markets were monitoring risk conditions closely following the US and UK strikes on Houthi rebel positions in Yemen.

The action is designed to stop Houthi attacks on shipping in the red sea, but there were inevitably concerns over the risk of regional escalation.

There were strong gains for gold and significant net gains in oil markets, but overall risk appetite held steady with European equities able to make net gains on the day.

In this environment, the dollar failed to gain significant benefit on the day, especially with lower yields.

Commodity currencies posted net gains which also sapped potential US currency support.

As far as the US data releases are concerned, producer prices declined 0.1% for December compared with expectations of a 0.1% increase and the November data was also revised to show a 0.1% decline with the year-on-year increase held to 1.0%.

Core prices were unchanged for the second successive month with a 1.8% annual increase from 2.0% previously.

The data maintained expectations that producer prices inflation pressure are very limited.

Following the data, there were also significant gains in longer-term Treasuries with the 10-year yield declining to 3.93%.

This marked a significant reversal from immediately after Thursday’s consumer prices inflation data when yields peaked around 4.06%.

There was also a significant shift in Fed pricing with markets pricing in around an 83% chance that rates would be cut in March compared with a figure around 67% on Thursday.

According to Standard Chartered Bank Head of Global G10 FX Research Steve Englander; “Even though you wouldn’t say overall that the macroeconomic picture is screaming at you that they need to cut that fast, the market seems to be excited about the prospect of cuts.”

Carl Hammer, head of asset allocation at SEB Asset Management commented; "There are conflicting drivers at the moment. On the one hand we as a house expect risk appetite to do fairly OK, ultimately we think that the dollar will weaken.

He added; "Having said that, it's fairly clear that the U.S. is doing significantly better than Europe and China. So I think we're stuck here around the $1.10 handle in euro/dollar."

Scotiabank chief FX Strategist Shaun Osborne considers that market rate expectations will not be met; “If inflation proves even slightly resilient and the broader economy continues to hold up, some further adjustment in expectations for the March FOMC seems likely.”

He added; “Swaps pricing suggest a relatively high—all things considered—degree of conviction that the Fed will cut in March. Around 19bps is priced in today, up a little from the levels seen earlier in the week. This looks too rich to me.”

Looking at the technical outlook Osborne noted; “The EUR’s recent bull trend remains intact on the daily chart but trend support at 1.0925 today appears more vulnerable to attack as 1.10 is holding.”

According to Socgen; “We expect the Fed to cut rates much more aggressively than the ECB in 2024, allowing the Euro to make modest gains despite weak growth, but the data we have seen so far this month hasn’t shifted market sentiment.”

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TAGS: Euro Dollar Forecasts