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Euro to Dollar Outlook: "Advance to 1.1500 in 2024 Very Feasible" say MUFG

November 16, 2023 - Written by James Fuller


EUR/USD Exchange Rates Retreat from 2-Month Highs, US Retail Sales Data Disappoints Dollar Bears

After a slide on Tuesday, the dollar has recovered some ground with some second thoughts whether the Euphoria after the US data was justified.

The US data provided no further ammunition to dollar bears and the Euro to Dollar (EUR/USD) exchange rate retreated to 1.0850 from 2-month highs at 1.0885.

US retail sales declined 0.1% for October compared with expectations of a 0.3% decline and the September increase was revised higher to 0.9%.

Core sales increased 0.1% after a revised 0.8% increase previously.

The New York Empire manufacturing index also moved back into positive territory and the data still suggested that the economy was performing relatively well.

According to Scotiabank; Short-term trading patterns suggest the EUR may have reached a short-term peak. Downside pressure on spot is likely to be limited for now, however.

It added; “Firm support for the EUR should develop on minor dips to the mid-1.07s.”

The dollar index on Tuesday posted the sharpest one-day decline since November 2022, a slide which was triggered by lower-than-expected US inflation data.

ABN Amro commented on the inflation data; “All in all, this is a very positive report for the Fed, with now five consecutive months of relatively benign inflation readings. This further strengthens our conviction that the Fed is done raising rates, and it raises the risk that the Fed could yet pivot to rate cuts earlier than our newly-revised June call.”

According to MUFG; “The fundamental trigger yesterday – the inflation data – was certainly compelling, the breakdown of the data certainly suggests scope for continued deceleration.”

It notes that the super-core rate declined to the lowest level since September 2021.

From a medium-term perspective, MUFG sees scope for notable dollar losses; “There remains plenty of scope for further cuts to be priced if the activity data starts to weaken and in those circumstances EUR/USD advancing to the 1.1500-level in 2024 is very feasible.”

Credit Agricole expects that the Federal Reserve will protest against an excessive easing of financial conditions.

It notes; “That is exactly what the Fed has been trying to fight in the past few weeks, which could feed into a tug of war between US policymakers and market participants for the months to come. Against this backdrop, the USD could be poised for more frequent oscillations.”

Markets have priced out the possibility of a December move to raise rates.

According to CIBC; While there remains a risk the Fed could reassess its stance in early 2024, today's data, combined with evidence of a softening labour market and most importantly, the change in tone of the FOMC to show greater patience suggests December is likely off the table.

Markets are also pricing in close to 100 basis points of interest rate cuts next year.

ING sees rate cuts of 150 basis points next year, but remains wary over aggressive dollar selling at this stage; “We’d be wary of jumping too aggressively on a dollar bear trend now.”

ING added Resilient growth is what's been keeping the dollar stronger, and while we expect the US to head into recession in 2024, there is no hard evidence just yet. In other words, strong US activity figures remain a very clear possibility in the near term and could trigger an inversion in the US bear run.”

It expects EUR/USD to retreat to 1.0800.

Rabobank expects that Fed officials will retain a cautious view on policy for now and is wary over China; “while Chinese data may be showing more sparks of life, weak foreign investment data in the country suggests that it might be a while before optimism broadens.”

It is also very cautious over the Euro area; “Additionally, weak growth in the Eurozone suggests that EUR bulls will likely run into headwinds over the coming months.

According to the bank; “it is unlikely to be an easy ride for USD bears.”
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