Euro to Dollar FX Forecast: "Prone to a retest of the low/mid 1.08s" say Scotiabank

January 26, 2024 - Written by John Cameron

STORY LINK Euro to Dollar FX Forecast: "Prone to a retest of the low/mid 1.08s" say Scotiabank

ECB Lagarde Fails to Deliver Hawkish Rhetoric, EUR/USD Exchange Rate Retreats to near 1.0850

US data releases were mixed on Thursday while markets priced in slightly more interest rate cuts by the end of 2024 following the latest ECB policy decision and press conference.

In this environment, the Euro drifted lower with the Euro to Dollar (EUR/USD) exchange rate declining to near from highs at 1.0900, although overall ranges were still relatively contained ahead of next week’s Fed policy decision.

According to Scotiabank; “markets are not showing an awful lot of conviction either way at this point, with event risk looming large on the near-term horizon.”

The first estimate for US fourth-quarter GDP came in at an annualised rate of 3.3% compared with 4.9%, but above consensus forecasts of 2.0%.

There was encouraging data on inflation with the GDP prices index declining sharply to 1.5% from 3.3% previously and below market expectations of 2.3%.

Initial jobless claims increased to 214,000 in the latest week from a revised 189,000 previously and above consensus forecasts of 200,000 while continuing claims increased to 1.83mn from 1.80mn.

Durable goods orders were unchanged for December compared with expectations of a 1.0% increase with core orders increasing 0.6% on the month.

The data releases tended to balance each other out with stronger than expected GDP data offset by higher initial jobless claims and a lower inflation reading.

Looking at the GDP data ING commented; “In theory that should be dollar-positive, but not necessarily risk-negative because the price data is far more important to the Fed right now.”

The reaction in bond markets was subdued with the 10-year yield holding around 4.14%.

The ECB made no changes to interest rates at the latest policy meeting which was in line with consensus forecasts and the refi rate was held at 4.50%.

Bank President Lagarde noted some favourable inflation developments with comments that almost all underlying inflation measures fell in December.

She added that some measures of domestic price pressures have started to ease while inflation could more quickly if energy prices evolve in line with the most recent downward shift.

She did, however, warn; “We are observing very carefully because we are seeing that shipping costs are increasing, delivery delays are increasing.”

As far as the economy is concerned, she still considered that downside risks prevailed and added; “Growth could be lower if the effects of monetary policy turn out stronger than expected.”

According to Lagarde, the consensus around the table is that it is premature to talk about rate cuts.

She added; “In terms of an overall evaluation of our policy trajectory, which many of you are after, we need to be further along in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner and in a sustainable way at target.”

Overall, there was a limited shift in expectations with markets pricing in 140 basis points of rate cuts by the end of 2024 from 130 basis points ahead of the statement.

Markets also see 50 basis points of easing by June.

ING expects EUR/USD support around 1.0850, but added; “the carpet could be pulled from under the euro should President Lagarde somehow convey the message that the policy rate will be getting cut in the summer after all.”

According to Commerzbank; “despite some small adjustments the market has been quite stubborn about its expectations in recent weeks and has refused to be convinced. In this respect, the ECB may not have an easy job today.”

Scotiabank also considers greater risks to the downside; “Spot’s rejection of 1.0920/30 yesterday leaves the EUR with limited upside potential in the near term and looking more prone to a retest of the low/mid 1.08s. Weak and mixed trend signals are not helping markets establish a stronger sense of direction at the moment so choppy, range trade seems likely to persist.”

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TAGS: Euro Dollar Forecasts