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Euro US Dollar Exchange Rate Forecast to Recover to 1.10: Nomura

April 14, 2024 - Written by Frank Davies


Following this week’s developments, US Dollar bears have been forced into hibernation. ING has dropped its forecast that the Euro to Dollar (EUR/USD) exchange rate will trade above 1.10 this year.

MUFG added; “We see further declines ahead.”

EUR/USD posted sharp loses on the week as markets reassessed the outlook for US interest rates while the ECB action met dovish expectations.

The main event of the week was the latest US inflation data.

Headline consumer prices increased 0.4% on the month with the year-on-year inflation rate increasing to 3.5% from 3.2% and compared with consensus forecasts of 3.4%.

Core prices also increased 0.4% for the month compared with expectations of 0.3% with the annual rate unchanged at 3.8% and above forecasts of 3.7%.

The data triggered a sharp shift in expectations surrounding Federal Reserve interest rates with a June cut now seen as unlikely while banks also lowered the number of cuts expected.

Goldman Sachs commented; “We believe the Fed will remain on hold at the current fed funds rate range of 5.25-5.5% until the first 25bp cut in July, after which we expect rate cuts to proceed at a quarterly pace with the next 25bp cut in November.

Deutsche Bank added; “Recent developments – namely, upside inflation prints, solid labor market data, and easing financial conditions – have clearly diminished the case for commencing rate cuts.”

Deutsche now expects that the first rate cut will come in December.

ING pointed to the global context; “The hot US CPI was the trigger to a substantial dollar rally, but the dovish (even if moderate) shift in the European Central Bank and the Bank of Canada messaging has now made that rally more sustainable. Both banks have given a nod to market bets for a rate cut in June, and rightly so given the considerably more encouraging domestic inflation outlook than in the US.

It added; “As things stand now, the Federal Reserve looks unlikely to match that same dovishness, and the case for a growing divergence between an immobile FOMC and a bunch of dovish central banks is getting stronger. That implies a stronger dollar.”

The ECB held interest rates at 4.5% while preparing markets for a near-term rate cut with string hints over a move in June.

According to MUFG; “The degree in which the ECB was willing to signal a possible June cut was certainly as explicit as you could get with the statement undergoing considerable changes that laid out in essence conditions that merely have to continue as they are.”

It added; “President Lagarde repeats that the ECB does not target FX levels – we see increasing scope for further EUR/USD declines.

Danske expects underlying US out-performance; “We believe the US economy is fundamentally in a stronger position relative to the euro area, based on factors such as relative terms of trade, real rates, and relative unit labour costs. Additionally, there are clear signs that underlying inflation appears more persistent in the US compared with the euro area.”

In this context, Danske added; “A strong USD, coupled with tighter financial conditions, is necessary for the Fed to sustainably achieve its inflation target of 2%. Our forecast for EUR/USD on a 12M horizon is 1.05.”

Credit Agricole took a similar view; “We expect the ECB to start cutting rates earlier and more aggressively than the Fed and thus head into seemingly uncharted territory for EUR/USD this year.

It added; “The downside risks for EUR/USD could also grow if comparisons between the current episode and the US no-landing in 1995 (when the Fed cut only three times) continue and encourage investors to pare back rate cut expectations even further.”

Nomura is sticking to its view at this stage; “we maintain a modestly bullish view of EUR/USD recovering to 1.10, while we will be nimble on this thinking, depending on the upcoming HICP results.”
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