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Euro to US Dollar Outlook: Retreat to 1.06 say Wells Fargo

May 26, 2024 - Written by David Woodsmith


Standard Chartered expects the Euro to Dollar exchange rate (EUR/USD) will weaken to 1.05 and will remain at this level on a 12-month view.

Wells Fargo expects a retreat to 1.06 at the end of the third quarter before a recovery to 1.10 by the second quarter of 2025.

EUR/USD was unable to challenge 1.09 during the week and retreated to 1.0850 as tight ranges prevailed.

MUFG commented; “Despite the continued expectations of a ‘higher for longer’ Fed monetary stance fuelling renewed US dollar strength, it still has not materialised.”

It expects relatively low volatility will continue; “Incoming data will then dictate cuts following the summer break but we by then would expect a similar trajectory of cuts from the ECB and the Fed. Assuming we avoid a further rebound in inflation and see some further moderation in employment growth, it is hard to see conviction of divergence and hence EUR/USD moves will remain contained.”

According to Wells Fargo; “In our view, this correlation between the Fed's monetary policy outlook and the direction of the dollar is likely to continue over our forecast horizon.”

The bank added; “With the Fed shifting to a slightly less dovish stance, we continue to believe the dollar can broadly strengthen over the next several months. Once the Fed makes a clear pivot to rate cuts, we believe depreciation pressures can build on the greenback, and a downtrend in the dollar can persist for most of 2025.

Federal Reserve minutes from May noted that inflation had not retreated further during the past few months.

The US PMI business confidence data was also stronger than expected with the services index at a 12-month high of 54.8 from 51.3 previously.

MUFG considered that the underlying data was less positive; “the employment index rebounding from 47.3 to 49.4, still below the 50-level – the first consecutive readings below the 50-level since June 2020 in the midst of the pandemic turmoil. So the data is still consistent with a weakening labour market.”

It also noted that the output price index suggested limited inflation pressures.

According to Standard Chartered, there is scope for dollar gains due to the level of interest rates. We remain modestly bullish on the USD over the next 1-3 months. While US bond yields have started to fall as inflation started to soften once again in April, we believe inflation expectations and bond yields are likely fall at a gradual pace. Bouts of geopolitical risk are also likely to trigger periodic demand for the USD as a safe haven.”

Danske sees only a very gradual slowdown in the economy; “The Fed has communicated that sudden deterioration in labour market conditions could warrant earlier easing of the policy stance, but low number of layoffs sends no such signals. We continue to see the latest data consistent with gradual rate cuts, which we expect to start in September this year.”

It did, however, add; “With two CPI reports and jobs reports before the July Fed meeting, a summer cut could still be in play, especially as US data surprises have turned negative. That suggests a tilt towards lower USD rates, and the possibility of a slight topside risk to EUR/USD.”

Looking at the Euro area, there are still very strong expectations of a June ECB rate cut.

Danske, however, expects medium-term expectations of rate cuts will be scaled back; “With the pickup in activity and sticky inflation, we expect the ECB to have a more restrictive monetary policy stance than before.”

MUFG does not expect consecutive cuts; “The data we believe is consistent with the June rate cut going ahead (it’s hard to back-track now) but then likely skipping another cut in July.”

Evidence of a stronger Euro-Zone economy and tougher ECB stance would support the Euro.

ING notes modest improvement in the German economy; “Looking ahead, the German economy should gain more momentum. Strong wage growth should fuel a cautious recovery in private consumption and even the inventory cycle should gradually start to turn positive. However, this cyclical improvement does not mean that everything is suddenly hunky-dory again in Germany.”
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