November 12, 2023 - Written by Ben Hughes
STORY LINK Euro to Dollar Forecast 2024: Large Swings Around 1.08, say Nordea
Foreign exchange strategists at Nordea
expect that the Euro to Dollar exchange rate (EUR/USD) will fluctuate with large swings around 1.08 until the middle of 2024.
Commerzbank expects EUR/USD will edge lower to 106 at the end of 2023 before a recovery to 1,12 in June 2024.
In a panel discussion on Thursday, Federal Reserve Chair Powell stated that the central bank is not confident that it has achieved a sufficiently restrictive stance.
He added that the Fed is attentive to the risks that stronger growth could undermine inflation progress which could warrant a monetary policy response.
According to Powell; "If it becomes appropriate to tighten policy further, we will not hesitate to do so."
Markets are still confident that there will be no rate hike at the December meeting, especially as Powell stated that the Fed would continue to move carefully.
The main impact of the hawkish rhetoric was a dip in expectations that rates could be cut in the first half of 2024.
As far as near-term expectations are concerned, market pricing indicates less than a 10% chance of a December rate hike with close to a 20% chance of a January hike.
ING noted; “The hawkish rhetoric pushed by Powell suggests that the Fed still prefers higher Treasury yields doing the tightening rather than hiking again, and that is exactly what markets are interpreting.”
Nevertheless, ING sees a floor for yields and the dollar; “The soft auction for long-dated Treasuries also signals the post-NFP correction in rates may well have been overdone and could set a new floor for yields unless data point to a worsening US outlook.”
It expects the Fed to resist any short-term shift in rhetoric; "There is no point in corralling the market into expecting cuts until shortly before they look necessary."
There were fresh losses for Treasuries and US yields moved sharply higher with the 10-year yield above 4.60%.
Treasuries continued to struggle on Friday with the 10-year yield close to 4.65%.
According to Scotiabank; “While the Powell comments dominated afternoon trading yesterday, the biggest move in yields came following the weak bond auction, rather than Powell’s remarks.”
Higher yields have boosted the dollar, but the correlation may not be sustained.
Scotiabank added; “Rising yields which reflect rising risks for holding US Treasury debt rather than the underlying strength of US economic data are not necessarily going to support the USD moving forward.”
Nordea added; “there are more FX drivers than interest rates and we are still inclined to think that the USD fortunes will turn going into 2025. For one, it is unlikely that the solid US economic outperformance vis-à-vis the rest of the world will last.”
ING is not convinced that the dollar can make strong headway; “The rebound in yields should put a floor under the dollar, but we suspect some reassurances from the data side will be needed for another big jump in the greenback.”
EUR/USD lost ground during the week, but was broadly resilient with support around 1.0660.
JP Morgan Economist Michael Feroli commented; "The forward-looking implication is that the so-far immaculate disinflation may get a little more painful in the future. We still believe the Fed is done hiking for this cycle, but today’s speech should serve as notice that their rhetoric must stay hawkish until they’ve seen further improvement in inflation."
In this context, next week’s data will be important with a series of big releases.
The latest US consumer prices inflation data will be released on Tuesday.
Retail sales data is scheduled for Wednesday together with the latest New York Empire manufacturing survey.
BoA expects headline prices will increase 0.2% on the month with a core increase of 0.3%.
It added; “we believe a report in line with our expectations would keep the Fed poised and ready to act despite the more dovish rhetoric in the November presser. The Fed is still data-dependent and inflation is still above target.”
Credit Agricole pointed to other fundamentals which could have a significant market impact; “Focus will also be on the US Congress ahead of 17 November when the stopgap measure used to prevent a government shutdown in October Expires.”
Commerzbank expects a Euro recovery next year. According to the bank; “This is likely to be driven primarily by the US Dollar, which is likely to suffer from the expected US interest rate cuts, just as it had previously benefited from the interest rate hikes.”
The bank also expects that the ECB will maintain a restrictive policy.
It added; “EUR/USD should also receive some support from the fact that the ECB is likely to cut interest rates less than the markets expect.”
According to Bank of America; “While we continue to expect the USD to stay on the stronger side for the remainder of the year, we also still ultimately expect softening over the medium-term into 2024, led by our end-2023 EUR-USD forecast of 1.05 and end-2024 forecast of 1.15.”
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TAGS: Euro Dollar Forecasts