February 11, 2024 - Written by Frank Davies
STORY LINK Euro to Dollar Forecast 2024: Retreat to 1.05, Rebound to 1.15 by 2025?
Currency analysts at SocGen sees a risk that the Euro to Dollar exchange rate (EUR/USD) will slide to 1.05 if expectations of US Federal Reserve rate cuts are scaled back further.
NatWest also sees the risk of a near-term retreat to 1.05, but forecasts a rebound to 1.15 by year-end as the Fed does cut interest rates.
EUR/USD hit 11-week lows below 1.0725 early in the week in a continued reaction to the bumper jobs report before a recovery to 1.0785.
Debate surrounding the US economy continued, especially with a further assessment of the bumper jobs data for January.
US economic data was broadly firm with a stronger reading for the ISM services index.
HSBC considers that the speed of central bank rate cuts will dictate currency performance; "The race has started, with the market at first questioning whether the dollar would continue weakening at the beginning of this year. Now I think they've come to believe the strong dollar should be closer towards leading the pack.”
He added; "Overall, we believe in a strong dollar this year, but not an exceptional one like in 2021 and 2022."
According to Socgen; “Of course, one swallow doesn’t make a summer but I haven’t seen any swallows this winter, either. The question is whether the next move is a hike, as much as when they will cut. The contrast with Europe, stuck in the slow lane, and China, trying to get out of the mud, is stark.”
SocGen added; “If the market embraces the idea that the Fed’s projection of three cuts this year is what’s going to happen, then the Dollar’s in for 2-3% more upside from here, and EUR/USD could test 1.0500 at some point.”
Deutsche Bank took a similar view; “Based on current betas, were May to end with no Fed rate cut, EUR/USD would trade with a 1.05 handle. In contrast, because a cut is still 90% priced through the May FOMC meeting, a 25bp cut in May would presumably not imply much top-side on EUR/USD from current levels.”
It added; “However, if a cut were to occur in March that would also refashion May expectations as well, it would be consistent with levels solidly above 1.10.”
RBC Capital Markets notes that short dollar positions have probably been squeezed to an important extent; “That has probably run its course for now so we look for USD to range-trade for the next 1-3 months with a bias to end H1 at the stronger USD-end of the range (EUR/USD 1.06).
It added; “To turn USD around, we think we’d need to see a material slowdown and/or much deeper banking stress than anything seen so far. For USD to break higher, we’d need to see reacceleration in inflation and/or a bigger non-US risk off shock (escalating conflict in the Middle East).”
Investment banks are also starting to focus on the November US Presidential election.
HSBC commented on the implications of a Trump victory; “Higher rates could be USD-positive, more risk appetite could be USD-negative while structural concerns could have an ambiguous outcome.”
HSBC also pointed to the risks of trade tensions and geopolitics.
It added; “There are no quick and easy take-aways, but more broadly we expect the political uncertainty to be supportive of the USD.”
According to Westpac; "While pricing for the March FOMC has been trimmed to negligible levels, there's still latent upside fuel for the USD in pricing for FOMC meetings beyond that."
It added; "We assume U.S resilience can extend well into 2024 and will make for a bumpy disinflation last mile."
Credit Agricole considers that the dollar is stretched; “In the absence of any upside US data surprises or more-hawkish-than-expected Fed comments therefore, chances are that the USD gains could stall from here. We also note that our fair value model signals that the currency is starting to look overvalued vs a number of G10 currencies.”
As far as the Euro-Zone is concerned, RBC sees scope for substantial capital repatriation; “A narrowing in hedging costs, of the sort we saw in 2020, could lead to a material move higher in EUR/USD. We have pencilled that in for 2025 though the timing is highly uncertain.”
MUFG remains concerned over the Euro-Zone economy; “The release yesterday of the latest German industrial production data for December provided further evidence that the euro-zone economy was weak at the end of last year although data releases have started to beat expectations on the whole at the start of this year.”
It added; “Overall we continue to judge that risks are titled modestly to the downside for EUR/USD in the near-term.”
According to NatWest; “EUR/USD is still expected to finish '24 higher than where it finishes '23, but this reflects expectations for a weaker USD rather than a positive view on EUR.”
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TAGS: Euro Dollar Forecasts