Euro US Dollar (EUR/USD) Exchange Rate Trapped in Narrow Ranges Near 1.0950

Modified: Tuesday, 16 January 2024 08:15 BST - Written by John Cameron

STORY LINK Euro US Dollar (EUR/USD) Exchange Rate Trapped in Narrow Ranges Near 1.0950

The US Dollar has been trapped in narrow ranges on Monday with a firm underlying tone.

The main move has been in the yen with the Dollar to Yen (USD/JPY) exchange rate surging to 145.90.

As far as the Euro to Dollar (EUR/USD) exchange rate is concerned, it has settled just below 1.0950 with a slight negative bias and no challenge on 1.1000.

According to Scotiabank; “the somewhat firmer USD tone is appropriate in my opinion, given the recent strength in US economic data and comments from Federal Reserve officials who have suggested market pricing for a March rate cut (19bps at writing) is optimistic.”

There has been only a small shift in pricing with Fed Funds rate futures indicating that the chances of a March rate cut have declined to around 72% compared with just over 80% at the end of last week.

Deutsche Bank strategist Jim Reid commented; "Despite the upside surprise to the CPI on Thursday, investors grew increasing confident that the Fed is likely to cut rates soon."

The highest profile US data release this week will be the retail sales data.

Scotiabank added; This week’s US data run—regional Fed activity data, Retail Sales, IP, U. Michigan Sentiment and the Beige Book etc.—may help resolve the apparent disparity between market pricing for early rate cuts and the undertone of the US economy one way or another. Technical signals and seasonality lean towards the USD strengthening somewhat in the next few weeks still.”

According to ING; “Our view remains that the Fed won’t start cutting before May, and that the total easing package will be 150bp. Accordingly, the rally in short-term USD rates appears overdone, and weakness in the front part of the USD curve should support some recovery in the dollar.

Nevertheless, it added; “However, we suspect that the data may prove insufficient to trigger a USD rebound for now; the consensus view of a dollar decline later this year seems to be making investors keen to sell dollar rallies.”

As far as the Euro is concerned, markets will continue to monitor ECB rhetoric closely.

In particular, comments from President Lagarde will be important as she takes part in a panel discussion at the Davos World Economic Forum on Wednesday.

The Euro could gain some support if there is hawkish rhetoric from Lagarde.

According to ING; “Lagarde has a greater potential to influence markets given a clearly divided Governing Council, and we suspect that she will opt for a more hawkish tone compared to last week’s comments. There may be some help for the euro coming from Davos, although we should be wary.”

Scotiabank’s Shaun Osborne commented; “trading remains range-bound in effect but the EUR lost ground late last week, after being blocked by resistance at 1.10 and retains a weak technical undertone today. Key support in the low 1.09s remains vulnerable. A push back to the 1.07/1.08 range remains a risk, from my point of view in the coming weeks.”

Markets will continue to monitor the political and economic situation in China, especially after the weekend Presidential election in Taiwan.

The independence-leaning DPP secured the presidency for the third time in a row.

According to Danske Bank; “Lai's victory was smaller than his predecessor Tsai Ing-wen and DPP lost the majority in the parliament. Hence Lai is ruling with a weaker mandate than Tsai Ing-wen. Lai's victory was also secured by keeping a more moderate tone on independence than before he became presidential candidate suggesting that he is unlikely to increase confrontations with China.”

It added; “Overall, the election points to continued tensions in the Taiwan Strait but not a further escalation.”

As far as the economy is concerned, the monthly raft of data including retail sales and GDP will be released on Wednesday.

Weak data would tend to underpin the dollar amid expectations of a fragile Chinese economy.

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TAGS: Euro Dollar Forecasts