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Euro to Dollar Forecast Next Few Weeks: 1.0650-1.1000 say Westpac Analysts

February 2, 2024 - Written by Frank Davies


EUR/USD Exchange Rate Slides to 7-Week Lows as Fed’s Powell Says March Rate Cut is Unlikely

The dollar dipped at times following Wednesday’s Federal Reserve policy decision, but Chair Powell’s comments that a March rate cut was unlikely proved decisive and the dollar posted significant net gains.

Risk appetite was also less confident amid US regional bank concerns which helped support the US currency.

The Euro to Dollar (EUR/USD) exchange rate dipped to 7-week lows at 1.0780 before trading close to 1.0800.

The Federal Reserve held interest rates at 5.5% following the latest policy meeting which was in line with consensus forecasts.

According to the statement, the committee; “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

The main focus was on Fed Chair Powell’s press conference in which he was keen to emphasize that there had been six good months of inflation data and the Fed expects this progress will continue.

Nevertheless, Powell also insisted that the central bank wanted confirmation of the favourable trend before cutting interest rates.

In answer to a direct question, Powell stated that it was unlikely that rates would be cut at the March policy meeting. The caveat would be if there was evidence of notable deterioration in the labour market.

According to Nordea; “The upcoming CPI data remains key and could still hold the door open for a March rate cut but after today’s Fed meeting and Powell’s press conference it is more likely that the Fed will start lowering rates in May or June the latest so long as inflation data continues to be supportive.”

Forthcoming data releases will be important. MUFG noted; “The comments will place even more importance on the releases of labour market data in the coming months starting with the January nonfarm payrolls report tomorrow.”

Market pricing for a March rate cut has dipped to below 40%.

ING notes that the jobless claims and ISM manufacturing data will be released on Thursday. It added; “We doubt these will prove major market movers ahead of tomorrow's US NFP release. This means that DXY should continue to grind higher.”

According to the bank; “We see little reason to change our view that EUR/USD continues to trade near 1.08 for the majority of this quarter, before edging higher through the second quarter when it becomes clear that a Fed rate cut is imminent.”

ING noted the importance of inflation data with the next consumer prices report due on February 13th and benchmark revisions on February 9th.

MUFG commented; “In light of all the comments, the Fed appears on track to begin cutting rates in Q2 in either May or June. A slighter later start than expected to the Fed’s rate cut cycle supports our view for a stronger US dollar in Q1.”

There were fresh concerns over regional banks on Wednesday after New York Community Bancorp reported a huge loss for the fourth quarter of 2023 amid a sharp increase in provisions against potential loan losses.

According to ING; “That is a reminder that the first market move on any news like this is to secure dollar funding (normally dollar positive), with the dollar only selling off when calm is restored (usually by a Fed programme). We will be watching this playbook carefully over coming days and weeks.”

The Euro-Zone headline inflation rate declined to 2.8% for January from 2.9% previously, but this was slightly above consensus forecasts of 2.7%.

The core rate edged lower to 3.3% from 3.4%, but also slightly above market expectations of 3.2%.

Westpac considers that there could be reservations over core inflation; “The coming week may be lighter on critical data and so developments on EU politics and labour markets should heighten concern around second round inflation effects.”

According to ING, a decisive break of the 1.0790-1.0800 range opens up the 1.0715/25 region.

Westpac expects a 1.0650-1.1000 range over the next few weeks.
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