October 31, 2023 - Written by James Fuller
STORY LINK Euro to Dollar Exchange Rate Forecast: 1.02 in Three Months, say Rabobank
The Euro (EUR) exchange rates jumped higher on Monday, but faded sharply again on Tuesday and, according to Rabobank;
“In our view, fundamental factors suggest that the EUR’s tenacity will be brief. We maintain a 3-month forecast of EUR/USD1.02.”
According to foreign currency analysts at Rabobank, the US Dollar’s (USD) inability to benefit from the firm US economic data and Middle East tensions has triggered limited dollar selling and Euro buying.
There was also some relief that Middle East tensions did not escalate during the weekend and oil prices are close to the lowest level since the Israel/Hamas conflict erupted on October 7th.
EUR/USD rallied to highs at 1.0655 on Monday, but failed to hold the gains and posted sharp losses to 1.0570 on Tuesday.
There was evidence of month-end position adjustment which undermined the Euro towards the European close.
Germany recorded slightly better than expected data on Monday with GDP contracting 0.1% in the third quarter compared with expectations of a 0.2% decline.
German retail sales, however, declined 0.8% for September and, according to Rabobank; “Economic data have made it clear that the German economy remains mired in stagnation.”
The bank expects weak data will lead to another Euro move lower.
Elsewhere in the Euro-Zone, the headline inflation rate declined more sharply than expected to 2.9% for October from 4.3% previously and below market expectations of 3.1%.
The core rate declined to 4.2% from 4.5% which was in line with market expectations.
According to flash data, the Euro-Zone economy contracted 0.1% for the third quarter compared with expectations of no change.
The data should maintain expectations of a less hawkish ECB policy.
Credit Agricole has a more positive assessment of the Euro outlook, especially with hopes that lower inflation data will underpin confidence in the Euro-Zone economy.
According to the bank; “In all, we expect that the combination of abating stagflation risks in the Eurozone and firm ECB commitment to its current policy stance to keep the EUR supported.”
As far as the US economy is concerned, consumer confidence declined to 102.6 from an upwardly-revised 104.3 the previous month and above consensus forecasts of 100.5.
The expectations index remained in recession territory for the month.
There was still vulnerability in manufacturing with the Chicago PMI index at 44.0 in October from 44.1 in September.
The employment cost index increased 1.1% for the third quarter of 2023 after a 1.0% increase the previous quarter.
The Federal Reserve will announce its latest policy decision on Wednesday.
There are very strong expectations that the Fed will hold interest rates at 5.25% and the overall language is expected to be broadly hawkish.
According to ING; “Softer eurozone swap rates have seen the two-year EUR:USD swap differential widen out again and provide a headwind to any EUR/USD recovery.
It added; “Unless US consumer confidence falls sharply, we doubt investors will want to chase EUR/USD through intraday resistance at 1.0630/40, especially ahead of tomorrow's FOMC meeting.
According to MUFG, the US Treasury refunding announcement, communication from Fed Chair Powell on Wednesday will be very important.
The bank also considers that Friday’s US employment report will be a key event for the US bond market.
US no-farm payrolls are forecast to increase 178,000 in October from 336,000 in September with the unemployment rate forecast to remain unchanged at 3.8%.
MUFG added; “The inability of the US dollar to strengthen further of late is telling but we still see the window for dollar gains as open until we see clearer evidence in official data of economic weakness – so in that sense, the NFP as always will be key.”
HSBC expects the Euro to struggle, but added; “On a positive note, the EUR’s structural allure is supported by the improvement in the Eurozone’s current account, together with supportive financial flows, compared to the US’s sizeable twin deficits.”
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