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Euro to Dollar Q1 2024 Forecast: Parity Call say Morgan Stanley

December 3, 2023 - Written by Ben Hughes

Foreign currency strategists at Morgan Stanley expect that the Euro to Dollar (EUR/USD) exchange rate will slide to parity by the end of the first quarter of 2024.

Wells Fargo expects that the dollar will lose ground in 2024 with the Euro to Dollar (EUR/USD) exchange rate at 1.11 at the end of 2024.

There was choppy dollar and Euro trading during the week as markets responded to the flow of data, central bank headlines and shifts in interest rate expectations.

Overall, both currencies struggled with markets pricing in more aggressive rate cuts next year.

EUR/USD broke above the 1.10 level for 3-month highs, but failed to hold the gains and dipped sharply to 1.0830 lows before settling around 1.0880.

According to HSBC; “It seems that those that bought the EUR simply because it is “not the USD” are now buying the USD because it is “not the EUR”.

The headline Euro-Zone inflation rate declined sharply to 2.4% from 3.2% previously, below consensus forecasts of 2.7% and the lowest reading for over two years.

The core rate also declined to 3.6% from 4.2% which was below expectations of 3.9% and the lowest reading since May 2022.

Following the data, markets priced in more aggressive rate cuts with rates expected to decline by 100 basis points by the end of 2024.

HSBC still sees the potential for a more aggressive ECB pushback; “absent major negative surprises on growth, we still think it is unlikely that the ECB will be satisfied already by April (or even March) that there is enough evidence of inflation reverting back to 2% in a sustainable manner.”

Federal Reserve comments had a big impact earlier in the week.

Markets seized on comments by Fed Governor Waller who stated that; “If you see this (lower) inflation continuing for several more months, I don’t know how long that might be – say 3mths, 4mths, 5mths – you could then start lowering the policy rate because inflation is lower”.

He added that there’s no reason to keep interest rates at a very high level if inflation is back to target.

Waller has been one of the most hawkish Fed members during the past year and these comments suggested a significantly more dovish stance and that he was now more confident that inflation would come under control.

There was evidence of significant divisions with fellow Governor Bowman stating that she thought interest rates would still need to increase further to meet the 2% target on a sustained basis.

Fed Chair Powell stated that interest rates would be increased again if needed to lower inflation and it’s premature to say that policy is restrictive enough.

Powell, however, stated that the Fed is not in a rush as it is getting what it wanted to get.

As far as inflation is concerned, the core PCE prices index increased 0.2% on the month with the year-on-year increase declining to 3.5% from 3.7%.

This was in line with market expectations and the lowest reading since June 2021.

The ISM manufacturing index remained in contraction for the 13th successive month with no change from 46.7 in October while prices declined marginally.

Markets, however, were pricing in over a 50% chance that interest rates would be cut by March with an 85% chance of a cut by May.

The Federal Reserve will announce its latest policy decision on December 13th.

According to Credit Agricole; “we think that the markets have gone well ahead of themselves pricing in Fed rate cuts. We expect the FOMC to disappoint the dovish market expectations in part because we think that the recent disinflation trend would slow down in the coming months. This could help the USD to consolidate at the start of 2024.”

Bank of America (BoA) still expects faster US growth than the rest of the G10, but expects the gap will narrow.

According to BoA; “We are confident that the USD will weaken across the board—against all other G10 currencies—if our baseline plays out.”

BoA notes potential risks to the scenario and considers that markets may have got ahead of themselves which will delay a dollar reversal.

It notes; “We would not necessarily expect more rate hikes if inflation proved stickier than markets expect, but Fed cuts may come later than markets are currently pricing, particularly following the latest repricing expecting the Fed to start cutting rates as early as March. In this case, it will also take longer for the USD to weaken towards its long-term equilibrium.

The global outlook will also have an important impact with a particular focus on China.

According to Wells Fargo; “Beijing, policymakers seem to be finally taking a more determined approach to ring fencing property sector solvency and liquidity risks.

A less challenging Chinese backdrop would help underpin the Euro.

Wells Fargo added; “With a U.S. dollar peak now seen as closer than previously, we believe the approach of market participants will soon transition to one of selling the U.S. dollar on rallies or, equivalently, buying foreign currencies on dips.”
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