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Euro to Dollar 2024 Forecast: "A more constructive EUR trend should develop into Q2/Q3"

February 14, 2024 - Written by Tim Boyer


Dollar Surges to 3-Month Highs on Stronger Than Expected US Inflation Data, EUR/USD Exchange Rate Slides to Test 1.0700

Market expectations surrounding US interest rate cuts have faded throughout the past few weeks and the latest US inflation data triggered another sharp dip in expectations.

The currency index overall hit 3-month highs with the Euro to Dollar (EUR/USD) exchange rate also sliding to test 3-month lows at 1.0700 before finding an element of support.

EUR/USD will need to regain and hold 1.0720 to ease selling pressure.

USD/JPY also jumped above the 150.0 level to near 150.50.

There was some evidence of distortions in the data, but the dollar will remain firm unless the US data deteriorates.

Danske Bank commented; “The sharp monthly rise in the ‘super core’ signals some one-off effects from companies adjusting only prices in January. But overall, the CPI report points to risks of more persistent underlying inflation in the US.”

Scotiabank noted; “A drop back in the EUR to 1.0500/1.0600 may develop before renewed EUR buying interest emerges.

It added; “A more constructive EUR trend should develop into Q2/Q3.”

US consumer prices increased 0.3% for January compared with consensus forecasts of a 0.2% increase.

The headline annual inflation rate declined to 3.1% from 3.4%, but above market expectations of 2.9% and failing to dip below the 3.0% level.

Energy prices declined 0.9% on the month with a 4.6% annual decline.

Core prices increased 0.4% on the month compared with consensus forecasts of 0.3% and the year-on-year rate held at 3.9% compared with expectations of a decline to 3.7%.

There were declines in vehicle and apparel costs, but shelter prices increased 0.6%.

Even with distortions, the Federal Reserve will be disappointed over the latest data with particular concern over core services prices.

Following the data, markets priced out any chance of a March rate cut and the chances of a May cut dipped sharply to below 40% from 60% ahead of the data.

The BLS updated the seasonal factors, and new weights, which saw the housing share rising and that of new and used cars lowered, were used to calculate the January CPI data.

That could partly explain the stronger-than-expected readings.

ING also noted that inflation readings have been mixed, but considers that the Fed will have to take note.

According to the bank; “Nonetheless, today’s miss will embolden the Fed to signal it is in no hurry to cut interest rates with the market moving back to only fully pricing three 25bp rate cuts this year, the same as suggested by the Fed’s December dot plot of individual FOMC members with June the start point for cuts.

It added; “That said, things can move fast and nothing is set in stone – it was only a few weeks ago that the market was pricing seven 25bp moves starting in March.”

Kathy Jones, Charles Schwab’s chief fixed-income strategist added; “The Fed will view this as another reason to wait until May or June, but the direction of trend is still lower. With much of the increase due to housing, it’s a waiting game to see when those costs will come down.”

Earlier, the German ZEW economic sentiment index improved further to a 12-month high of 19.9 for February from 15.2 previously and compared with consensus forecasts of 17.4.

The current conditions component, however, deteriorated further to -81.7 from -77.3 previously.

ING saw some glimmers of hope; “even though the ZEW index is definitely one of the worst-performing leading indicators in Germany when it comes to predicting GDP growth, it has a recent track record in predicting turning points.”

The bank added; “With this in mind, today’s numbers very tentatively signal better times ahead. At the same time, however, any cyclical improvement of the German economy will be too weak to offset structural weaknesses. Today’s ZEW index does little to change the base case scenario of yet another year of recession in Germany.”
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