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Euro to Dollar: "Squeeze Higher Towards 1.09 may Develop" say Scotiabank

February 20, 2024 - Written by Frank Davies


The Euro to Dollar (EUR/USD) exchange rate edged just above the 1.08 level after the latest Euro-Zone wages data and advanced to 2-week highs around 1.0820 as narrow ranges again prevailed.

Low volatility and solid equity markets have combined to curb potential dollar demand with markets waiting for the next major data releases.

Overall positioning is now much more balanced with a sharp reduction in long Euro positions, limiting the scope for further Euro selling.

There are also fresh doubts whether the ECB could deliver an April rate hike.

According to the latest data, growth in Euro-Zone negotiated wages slowed to 4.46% in the fourth quarter of last year from 4.69% in the previous quarter which was the highest reading since the start of the data series in 2005.

ING commented; “While we anticipate that wage growth will moderate significantly over the course of 2024 on the back of abated inflation and weakened economic conditions, it must come as a relief in Frankfurt that negotiated wage growth fell from 4.7 to 4.5% in the fourth quarter.”

It added; “Still, the fourth quarter drop is a small decline and therefore we don’t expect the ECB to be particularly hasty in deciding on first rate cuts. It is too small to open the door to an ECB rate cut in March.”

According to ING; “The June meeting – after another quarter of wage data is released – looks like a good moment for a first 0.25% rate cut to us.”

MUFG notes that the stronger than expected US inflation data last week is still reverberating around currency markets.

According to the bank; “It has encouraged market participants to further delay expectations for the first Fed rate cut until the June FOMC meeting. We are not expecting the release of the minutes from the January FOMC meeting and/or comments from Fed Vice Chair Jefferson and Governors Bowman and Waller to bring forward rate cut expectations this week.”

Danske Bank has revised its forecast for US interest rates and now expects that the first cut will come in May as opposed to March previously.

It adds; “Our longer-term view of solid structural growth and continuing disinflation still holds, and we think the Fed will opt for gradual quarterly reductions afterwards. In total, we see three cuts in 2024, in May, July and November (previously four).”

Danske notes that the Euro has been resilient; “our USD-bullish argument, centred around markets scaling back on rate cut expectations, has essentially been exhausted. However, that does not make us more pessimistic about the USD in the near term. One could argue that it is perhaps a bit surprising that EUR/USD has not declined more than it has over the past month when considering the resilience of US macro data.”

Danske considers that the Euro will be vulnerable to more significant selling if there is a significant setback in risk appetite and a slide in equities.

It also expects that the Euro will lose ground if there is a wider increase in volatility.

There has been no significant change in Federal Reserve pricing with the chances of a May rate cut holding below 40%.

According to Scotiabank pressure on the dollar may be building again.

It added; “risk reversals suggest weakening demand for topside USD protection in the past couple of weeks, rather suggesting there is little or no faith in the USD’s new year rebound being sustained. That would be in keeping with the typical seasonal pattern of trade (early year gains in the USD typically give way to weakness in Q2/Q3).”

The bank noted that the Euro is trading higher for the fifth session on the trot and downside Euro pressure has been blunted.

It added; “A squeeze higher towards 1.09 may develop if the EUR can hold these gains.”
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