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Euro to Dollar FX Forecasts: 1.07 in One Month, 1.05 in Three

February 5, 2024 - Written by Tim Boyer


US Dollar Extends Gains after US Prices Data, EUR/USD Exchange Rates Slide to 11-Week Lows

The US data on Monday was again stronger than expected and, although there were still concerns that official data was overstating US strength, there was still further US gains, especially with European currencies again generally out of favour.

The Euro to Dollar (EUR/USD) exchange rate dipped to 11-week lows just below 1.0725 before stabilising into the European close.

The US ISM services-sector index strengthened to 53.4 for January from 50.6 previously and above consensus forecasts of 52.0.

There was no change in the business activity index with solid expansion for the month while new orders increased at a faster rate.

There was a significant improvement in the employment index to just above the 50.0 level.

According to ING; “The ISM employment index has now rebounded to 50.5, but this is only indicating very modest hiring and leaves the index in line with its 6M average. It is fine, but certainly not consistent with two consecutive months of 300k+ payrolls.”

Although the data reinforced expectations that the economy is still generating significant growth, there was still important divergence between survey evidence and official data.

ING added; “the ISM's are at levels historically consistent with GDP growth closer to 1%. These ISM’s have been going for decades and we had assumed we would soon start to see a convergence between upbeat official economic data and more cautious private sector data. No sign of that happening yet though.”

The prices index increased to 64.0 from 56.7 and the strongest reading since March 2023.

The higher reading for the prices index also increased speculation that inflation pressures within manufacturing were less benign.

Following the data, there was a further erosion of already slim expectations of a March Federal Reserve interest rate cut with the chances dipping below 15%.

The chances of rates not being cut in May also increased to near 40% from less than 12% last week.

The shift in expectations provided further dollar support and there were further losses in Treasuries with the 10-year yield increasing to near 4.18% and the highest level for over 10 days.

The data overall also maintained expectations of US out-performance.

Steven Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank commented; "The question is, who can keep up with the U.S. in terms of the rates adjustment? The market's answer so far is not too many central banks and not too many of their currencies."

The Euro-Zone Sentix investor confidence index improved to -12.9 for February from -15.8 previously and above consensus forecasts of -15.0.

According to Sentix; “The Sentix Economic Sentiment Index for the eurozone rises for the fourth time in a row to -12.9 points. Nevertheless, the recovery process is proceeding slowly and the all-clear still cannot be given.” Primarily this reflects concerns over Germany.

Germany reported a wider trade surplus for December, but this was due to a 6.7% monthly drop in imports while exports declined 4.6% for the month, reinforcing concerns over the economy.

Jane Foley, head of FX strategy at Rabobank again pointed to Euro-Zone vulnerability; “We have stagnation in Germany. I think we're going into a period when it's going to be really hard for the euro to make significant gains."

She added; “We maintain our one-month EUR/USD forecast of 1.0700 and our three-month target of 1.0500.”

According to Scotiabank; “Fed repricing plus USD-positive seasonal trends (through Q1) plus building technical momentum (with the DXY testing the 50% retracement of its Q4 slide) point to gains extending a little more in the next few weeks, although the rebound in the DXY is overstating the improvement in yield differentials in the USD’s favour to some extent at the moment.”

Scotiabank expects a test of 1.0710 in EUR/USD.
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