October 17, 2023 - Written by John Cameron
STORY LINK Euro to Dollar Forecast: 1.02 in Three Months say Rabobank
US Economy Continues to Out-Perform, Rabobank Maintains 3-Month EUR/USD Exchange Rate Forecast of 1.02
A key feature for bond and currency markets is that the US economy continues to outperform Europe and this is continuing to benefit the dollar.
According to Rabobank; “We maintain a forecast of EUR/USD 1.02 on a 3-month view.”
Bonds have come under sustained selling pressure on Tuesday. The US 10-year yield jumped close to 15 basis points to 4.85% and close to 16-year highs.
Bonds had attracted defensive demand on Middle East fears, but his buying has reversed aggressively.
The Euro to Dollar (EUR/USD) exchange rate has been resilient and trading around 1.0550.
Higher bond yields will tend to boost the dollar in the short term and undermine the Euro due to fears over peripheral bond spreads.
Longer-term, there will be dollar concerns if the move is being driven by substantial sales from China and Japan.
Markets have been expecting a significant slowdown in the US economy, but the data has not been co-operating with this narrative.
The latest US retail sales data, for example, was stronger than expected.
Headline sales increased 0.7% for September compared with expectations of a 0.3% increase and the August increase was revised higher to 0.8% from 0.6%.
The closely watched control group also increased 0.6% after a revised 0.2% increase previously.
Fed rhetoric will continue to be watched closely.
According to HSBC; “Fed Chair Powell’s speech on Thursday will likely see a reiteration of what we’ve heard recently – tighter existing financial conditions lessen the need for further tightening.”
Credit Agricole notes that the dollar has failed to generate strong defensive support from the Middle East tensions.
It notes; “A dovish Fed stance could further prevail also as long as oil prices remain 'well-behaved' in the face of lingering tensions in the Middle East.”
Socgen, however, expects that Middle East tensions will support the dollar; “Suspense around another Fed hike or pause in November, and geopolitics in the Middle East should keep the Dollar supported this week.”
It adds; “Downside risks should be limited unless 10y US Treasury yields drop below 4.50% and oil prices retreat.”
The German ZEW investor confidence index improved significantly to –1.1 for October from –11.4 the previous month and well above consensus forecasts of –9.3.
The current conditions component edged lower to –79.9 from –79.4 and the lowest reading since August 2020, although it was slightly stronger than expected.
According to HSBC; “ZEW expectations have started to bottom out, with optimists and pessimists almost balancing each other out.”
The bank added, however, that the current conditions component indicates that there will be a GDP contraction for the fourth quarter of 2023.
It noted that Euro remained subdued; “the EUR is failing to capitalise amid ongoing soft economic conditions, and we still see room for modest declines in EUR-USD in the months ahead.”
Rabobank notes that there are important fiscal tensions within Europe, especially with pressure for additional spending. According to the bank; “Budget concerns could spread since polls have indicated that far right and populist parties are amongst the top three most popular in almost half of the EU.”
Weak growth conditions will also tend to intensify budget fears. Recessionary conditions will curb tax revenue and there will also be even stronger pressures for increased spending.
According to Rabobank; “Even though we expect the US to fall into technical recession early next year, the likelihood of a downturn in both the Eurozone and the US, combined with slow growth for China, suggests that the USD will be supported by safe haven flows well into 2024.”
Danske Bank still expects net Euro losses on fundamentals grounds.
It adds; “Consequently, our projection for the cross remains at 1.06/1.03 over the next 6 to 12 months. However, in the near-term, we see the potential for USD weakness due to less positive economic surprises from the US.”
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TAGS: American Dollar Forecasts Euro Forecasts