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Euro to Dollar Forecast: EUR "Could Gain 10%" vs USD in Two Years say Citi

November 15, 2023 - Written by Ben Hughes


Eurozone data on Tuesday was slightly stronger than expected which provided some Euro protection, although the latest US inflation data had a much more substantial impact.

The latest US inflation data was weaker than expected which triggered a slide in bond yields and the dollar posted sharp losses.

The Euro to Dollar (EUR/USD) exchange rate jumped to 10-week highs at 1.0830.

According to Citibank; “For a sustained Dollar decline, two apparently contradictory events must occur. The Fed will need to remain activist and vigilant in lowering rates. And the economy must slow, but not too much.”

It added; “If the European Central Bank doesn’t ease monetary policy, real interest rate differentials suggest the Euro could gain perhaps 10% against the USD within the coming two years.”

US consumer prices were unchanged for October compared with consensus forecasts of a 0.1% increase. The year-on-year increase declined to 3.2% from 3.7% and below expectations of 3.3%.

Energy prices declined 2.5% on the month with a 4.5% annual decline.

Core prices increased 0.2% for the month compared with forecasts of 0.3% with the annual increase edging lower to 4.0% from 4.1% and below expectations of 4.1%.

This was the lowest core reading since September 2021.

The monthly increase in shelter prices slowed to 0.3% from 0.6% previously.

The data offered significant reassurance over inflation trends within the US economy.

Treasuries rallied strongly with the US 10-year yield sliding to below 4.50% from close to 4.60% ahead of the release.

According to SocGen; “For Dollar bears, a break of 4.5% in US 10s may be the key signal to look for a break above 1.08 in EUR/USD.”

It added; “Bullish [Euro] seasonality in December is one reason not to rule out additional upside into year-end.”

Equities also posted significant gains after the data with an increase of more than 1.0% in S&P 500 index futures.

There was a significant shift in pricing for US interest rates with Fed Funds rate futures indicating that there is no chance of a rate hike in December.

Markets also indicated that the chance of a January rate hike had dipped to below 5%.

According to Commerzbank; “Today's data should reinforce the market's view that the Fed will not raise its key interest rates any further (this has also been our forecast for some time).”

Brian Jacobsen, chief economist at Annex Wealth Management added; "You can say goodbye to the rate hiking era."

Lindsay James, investment strategist at Quilter Investors expressed some caution; “the path back down to target is going to be a long and arduous one, and may just give the Fed enough cover to ignore the calls for rate cuts for now, no matter how noisy they get.”

Richard Flynn, managing director at Charles Schwab UK expects a greater focus on the economy; “With wage growth slowing and sectors such as manufacturing losing pace, there is a risk that further tightening could trigger a problem in the economy.”

He added; “All in all, “higher for longer” looks like a much more sensible move than “even higher”.”

ING is confident over rate cuts next year; “We wouldn’t necessarily describe it as stimulus, but more a move of monetary policy to a more neutral footing with the Fed funds rate expected to end 2024 at 4% versus the consensus forecast and market pricing of 4.5%.”

Earlier the German ZEW investor confidence index improved to an 8-month high of 9.8 for November from –1.1 in October and above consensus forecasts of 5.0.

According to Scotiabank; “The improvement in expectations suggests that investors are a little more constructive on prospects as inflation abates and the ECB rate cycle peaks and, at the margin, should help bolster the recent improvement in the EUR, given the rather sour outlook investors have for Eurozone growth prospects.”

Euro-Zone GDP was confirmed at –0.1% for the third quarter.
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