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Euro to Dollar FX Outlook: US Labour-Market Remains in Focus

May 12, 2024 - Written by Frank Davies


MUFG expects that the Euro to Dollar (EUR/USD) exchange rate will strengthen to 1.1050.

According to MUFG; “A fourth consecutive monthly upside inflation surprise is required to inject fresh upward momentum into US rates and the USD in the near-term. Whereas in line or softer prints could see the USD give back more of the gains from the start of this year.”

It added; “One of the reasons why the USD has lost upward momentum has been building evidence that economic growth has picked up outside of the US at the start of this year.”

Goldman Sachs, however, forecasts that the Euro to Dollar (EUR/USD) exchange rate will weaken to 1.05 on 3 and 6-month view before a recovery to 1.08 in 12 months.

According to Goldman Sachs; “we think the Dollar will still be a hard bar to beat beyond the tactical horizon.”

EUR/USD was little changed overall during the week and settled around 1.0770.

During the week, Fed officials continued to point to the risk that interest rates will be delayed due to recent inflation trends.

The most significant data release during the week was on jobs with US initial jobless claims increasing to an 8-month high of 231,000.

The data is likely to have been distorted by seasonal factors, but the increase triggered fresh speculation that the labour market was cooling.

This followed the smaller than expected increase in non-farm payrolls reported last week. In response, the dollar lost ground.

ING commented; “We think we may well have seen the dollar’s pre-election peak and the dollar will again be sensitive to any decline in US activity and particularly US price data. At the same time, better-than-expected eurozone activity data and some calming in Middle East tensions mean that EUR/USD is seen as less of a one-way bet on the downside.”

It added; “We have several measures pointing to EUR/USD medium-term fair value around the 1.08 area and we doubt EUR/USD will stray too far from this level over the next month.”

The Euro-Zone PMI services-sector index for April was revised higher to 53.3 from the flash reading of 52.9.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “This looks pretty nice. Service providers have now expanded their activity for the third consecutive month, putting an end to the lack of dynamism observed in the second half of last year.”

ING Eurozone first-quarter growth was surprisingly strong, but the initial data for the second quarter is mixed. The upturn has certainly started, but its pace is likely to be moderate.

Citibank noted; “The global services PMI has now risen for six consecutive months, and recent gains have been driven by a recovery in the euro area data including particularly large increases in Germany and France.”

Central bank policies will inevitably be a key element.

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

ING commented on the medium-term outlook; “The question is pretty much what happens after June. A continuing modest recovery has taken away the need for aggressive easing. And we cannot exclude that the labour market tightens again later this year, reversing the downward trend in wage growth. And that will be enough for the ECB to tread carefully in its rate normalisation process.”

It added; “For now, we maintain our call of three rate cuts this year, but there is a risk that we’ll see only two of them.”

Morgan Stanley considers that the balance of risks over the next 3-6 months still favors the greenback and that the consensus is too bearish, in their view.

It also considers that; “Should higher-than-expected US growth and inflation continue, in turn leading real yields to rise, the dollar should perform well.”
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