Commerzbank: "Our expected correction in the EUR is probably likely to take some time"

Modified: Thursday, 18 January 2024 08:00 BST - Written by Toni Johnson

STORY LINK Commerzbank: "Our expected correction in the EUR is probably likely to take some time"

US Dollar Advances Further After US Retail Sales Data, EUR/USD Exchange Rate Hits Fresh 1-Month Lows

The Euro was broadly resilient ahead of Wednesday’s New York open before dipping again after the latest US retail sales data.

The Euro to Dollar (EUR/USD) exchange rate retreated to fresh 1-month lows at 1.0850 and will continue to struggle if equities retreat further.

Global equities remained firmly on the defensive with the German DAX index posting a decline of over 1.3% and US futures around 0.7% lower.

A key theme has been a scaling back of expectations surrounding interest rate cuts in 2024 which is hampering risk appetite.

US retail sales increased 0.6% for December after a 0.3% increase for November and compared with consensus forecasts of a 0.4% increase.

Core sales increased 0.0.4% on the month and compared with expectations of a 0.2% increase.

Following the data, there was a further net shift in interest rate expectations with markets now pricing in just below a 60% chance that rates will be cut in March.

The 10-year bond yield also increased to 1-month highs just above 4.12% which underpinned the US currency.

Fed Governor Waller stated on Tuesday; "I am becoming more confident that we are within striking distance of achieving a sustainable level of 2% PCE inflation. I think we are close."

Nevertheless, he added; "But I will need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably toward our inflation goal before backing rate cuts.”

The comments triggered fresh doubts over any near-term rate cuts.

According to ING; “1.0800 looks to be the near-term bias for EUR/USD.”

MUFG the dollar sell-off into year-end looked overdone and hence there remains scope for further dollar strength, especially on days like yesterday when we see bigger jumps in yields.”

HSBC expects a firm dollar tone; “The US Dollar will not be strengthening against most other currencies like it did when the Fed was in a rapid hiking cycle, but it has not run out of gas yet.”

Chinese data released overnight was mixed with GDP growth held to 5.2% from the 5.3% expected and retail sales growth of 7.4% was below consensus forecasts of 8.0%, but industrial production beat expectations.

According to Scotiabank; “Global stocks are trading lower as investor fret about the Chinese economy and expectations for swift rate cuts from the Fed fade.”

Scotiabank added; “The lack of follow through selling on the EUR today so far may delay a deeper sell-off in the short run. Weakness below trend support—now resistance—at 1.0930 yesterday imply more softness ahead and a deeper retracement of the EUR’s Q4 gains.

According to the bank; “Risks are tilted towards a drop back to the 1.07/1.08 range.”

ING expects there will be stubborn ECB resistance to interest rate cuts given near-term inflation risks; “Against this background of rather more upside than downside risks to inflation, any rate cut at the current stage doesn’t make any sense, at least not in the eyes of the ECB.”

It added; “Or, to put it differently, central bankers missed the inflation upswing; they now want to be fully sure of the inflation downswing and will, therefore, by definition be staying well behind the curve.”

Commerzbank, however, is not convinced that markets will listen to the ECB; “The market is unlikely to be dissuaded from the view that rate cuts are on the agenda in the near term, given the difficult economic situation and falling inflation.

It added; “Without new data pointing to a renewed rise in inflation or a more robust Eurozone economy, the market is unlikely to adjust its current expectations.”

According to the bank; “With secondary data due before the next central bank meetings, our expected correction in the EUR is probably likely to take some time.”

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TAGS: Euro Dollar Forecasts