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Euro to Dollar Parity Forecasts: "Bearish Outlook from Here" say Credit Agricole

April 21, 2024 - Written by Frank Davies


Foreign exchange analysts at ING no longer expect the Euro to Dollar (EUR/USD) exchange rate to trade above 1.10 this year.

Barclays expects a 1.05-1.06 range over the next few months.

Credit Agricole considers that some negatives are in the price of EUR/USD, but added; “we maintain our bearish outlook from here and now see a greater risk of the pair testing parity in coming months.”

EUR/USD dipped to 5-month lows near 1.0600 during the week before a recovery to 1.0670.

Risk conditions remained an important element during the week with further concerns surrounding Middle East tensions.

After Iran launched a wave of missiles against Israel at the weekend, Israel was reported as launching one missile against the Iranian Isfahan region.

After an initial slide in risk appetite, sentiment recovered later on Friday which triggered a limited dollar setback.

Barclays commented; “Escalating geopolitical tensions/higher oil prices add to the dollar's near-term appeal.”

The US economy and timing of Federal Reserve rate cuts will remain key elements for currency markets.

According to Barclays; “The Fed's cutting cycle is now on hold, pending more data on US domestic inflation persistence. This is already boosting the dollar on grounds of monetary policy divergence but this theme has more room to run, in our view.

During the week, US retail sales data was stronger than expected for March while the latest business surveys were mixed and labour-market data held firm.

Federal Reserve speakers emphasised that there was no need to rush in changing interest rates.

Markets are now pricing in less than a 20% chance of a rate cut in June and below 50% for July while expecting two cuts at most for 2024.

According to ING; “This month we are dropping our call that EUR/USD can trade above 1.10 later this year and early next. Three months of US core CPI at 0.4% month-on-month has put paid to our more aggressive call for Federal Reserve easing. Equally, the strong US labour market suggests there is no pressing need for the Fed to cut. Our team now looks for the first Fed cut in September – meaning USD can hold gains in the second quarter.

Danske Bank is not convinced that the economy will hold firm and it still backing three rate cuts this year.

ING expects weaker risk conditions will increase Euro vulnerability; “While we have been highlighting how a much stronger terms of trade and economic-fundamental position of the euro compared to 2022 hardly points to EUR/USD parity at this stage, it is possible that markets price in a deterioration in economic conditions in the eurozone as a consequence of higher geopolitical risk.”

As far as the dollar is concerned, it noted; “The high-yielding, safe-haven King USD should remain supported in the near term as tensions between Israel and Iran continue to escalate.”

It did add; “That said, looking beyond the immediate support from growing risk aversion, we may need to see upside surprises from the US Core PCE deflator next week to reignite the stalled rally in US rates and therefore the USD.”

There are very strong expectations that the ECB will cut interest rates in June.

According to Credit Agricole; “On our side, we think that the Fed could start easing in July and deliver a total of two rate cuts in 2024. We further expect the ECB to start cutting in June and deliver a total of three rate cuts this year.

Danske Bank commented; “For the ECB, we expect the widely anticipated rate cut in June to be followed by two more cuts later this year. Therefore, we believe that the aggressive repricing by the Fed is excessive, and if we are correct, this could provide some support to EUR/USD in the near term.”

Danske still expects EUR/USD will weaken to 1.03 on a 12-month view.
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