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Euro to Dollar Rate Forecast: 1.10 by Q1 2024, say MUFG

November 3, 2023 - Written by Ben Hughes


EUR/USD Exchange Rate Rally May be Premature Given US Data Flow, but 1.10 Predicted by Early 2024

MUFG forecasts that the Euro to Dollar (EUR/USD) exchange rate will weaken to 1.0450 at the end of 2023 as the US data remains firm.

Nevertheless, the bank considers that Fed policy, the US economy and the dollar are all close to turning points and it forecasts that EUR/USD will rebound to 1.10 at the end of March 2024.

The Federal Reserve held interest rates at 5.50% at the latest policy meeting which was in line with consensus forecasts and the vote was unanimous.

Guidance from Powell was similar to the previous meeting, although with a tentative dovish shift.

Powell stated that the central bank has come very far with the rate-hike cycle and that it is close to the end of the cycle.

He also stated that risks of doing too much or too little were balanced and recognised that bond yields had increased.

MUFG commented; “The Fed’s more cautious stance over the need for further rate hikes mainly reflects the recent sharp tightening in financial conditions.”

Powell, however, was certainly not willing to rule out further interest rate hikes and a tightening bias was maintained. He also commented that there was certainly no talk of lowering interest rates.

Following Powell’s comments, there was a strong rally in Treasuries with US yields moving to 7-week lows amid increased confidence that rates have peaked.

From highs near 4.94% ahead of the Fed policy meeting, the 10-year yields retreated to near 4.70%.

Lower bond yields were a key element in undermining the dollar in global markets.

The decline in yields also helped underpin risk appetite which curbed potential demand for dollar on defensive grounds.

EUR/USD advanced to 1.0620 in Europe on Thursday.

Wednesday's US data releases were mixed with a slightly softer tone.

The JOLTS jobs-openings data was stronger than expected at 9.55mn from a revised 9.50mn the previous month.

ADP data, however, reported a subdued 113,000 increase in private payrolls, below expectations of 150,000.

The ISM manufacturing index also declined to 46.7 for October from 49.0 previously and below market expectations of 49.0.

According to ING; “ING Despite the Fed retaining a tightening bias it seems investors are more interested in reading and trading a Federal Reserve pause.”

It added; “It may be too early to expect these short-end rates to go a lot lower just yet, but it does seem as though investors are a little more open to the prospect of weaker data knocking the dollar off its perch.”

ING is still doubtful that overall yield spreads will undermine the dollar. It notes; “such a differential is consistent with EUR/USD trading around 1.05-1.06 and, despite the acknowledgment that financial conditions have tightened, there weren’t enough dovish elements to trigger a material dollar correction.”

Kristoffer Lomholt, head of FX research at Danske Bank commented; "Powell had the opportunity to raise a bit of concern with the latest rise in short-term inflation expectations but he chose not to do that."

He added; "There was a possibility of sending a much more hawkish signal but he chose not to and I think that's what markets are reacting to."

Danske added; “EUR/USD edged up by approximately 50 pips and we maintain our near-term bias for higher EUR/USD on the back of a turnaround in the exceptional run of positive US economic data surprises.”

The bank maintains a longer-term weaker EUR/USD bias. It adds; “On the longer horizon, we forecast EUR/USD at 1.06/1.03 in 6/12M.”

According to MUFG; “the developments have provided a setback for the US dollar and will help to dampen upward momentum in the near-term. However, we do not yet see a sustained reversal lower while the US economic data flow remains strong.”
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