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euro forecast

 

Dollar pressure drives EUR/USD to 1.05, analysts see euro slipping further 

The euro (EUR/USD) was trading around $1.05 on Thursday, nearing levels not witnessed since December 2022. The currency pair appears to be dominated by the overall strength of the U.S. dollar, which is in turn driven by the Federal Reserve’s hawkish leanings and expectations of prolonged higher interest rates in the United States — a stance that has been widely referred to as “higher for longer”. 

Inflation data within the eurozone has portrayed a mixed picture: inflation in Germany slowed slightly more than anticipated, reaching its lowest point since the onset of the Ukraine conflict. Spain, however, saw inflation accelerating for the third consecutive month. The recent surge in oil prices, spurred by tight global supply on OPEC+ production cuts and U.S. stock drawdowns, has also compounded concerns about the potential for an inflationary spiral. 

Market sentiment is currently leaning towards the belief that the European Central Bank (ECB) is unlikely to pursue additional interest rate hikes within the remainder of the year — even though interest rates are expected to remain elevated for the foreseeable future. 

 

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EURUSD news: German inflation slows, eurozone economic sentiment falls for fifth straight month 

 In September 2023, German consumer price inflation declined to 4.5% year-on-year, marking a significant drop compared to the previous month's 6.1% and slightly below the market's anticipated rate of 4.6%, as per a preliminary estimate. This represents the lowest inflation rate since Russia invaded Ukraine in February 2022.  

Spanish headline inflation, however, rose for the third consecutive month, with the preliminary estimate for September showing a rate of 3.5% — up from 2.6% in August. Meanwhile, core inflation has decreased slightly, falling from 6.1% last month to 5.8%, as per data from Spain’s statistics service INE. 

Economic sentiment in the eurozone declined for the fifth consecutive month, albeit slightly less than anticipated, due to decreased optimism in the services, retail, and consumer sectors. The industrial sector, however, saw an improvement after seven months of decline. 

According to the European Commission's monthly survey released on Thursday, economic sentiment in the 20 eurozone countries dropped to 93.3 points in September — down from a revised 93.6 in August. This reading was slightly better than the expected decline to 92.5 points, as predicted by economists surveyed by Reuters. 

The U.S. dollar index (USDX), which monitors the strength of the greenback against six major currencies, retraced slightly from its strongest position since November on Thursday. The dollar's rise has brought the Japanese yen close to a level that could trigger intervention and pushed the euro to its lowest point in eight months, all while U.S. longer-term bond yields continued to climb. 

The dollar index saw a 0.3% decline on the day, trading at 106.3. However, it remained poised for an 11th consecutive week of gains and was just off its 10-month peak reached on Wednesday. 

The euro, which has been on the receiving end of the dollar’s strength, rebounded somewhat, advancing 0.33% on the day to reach $1.0537 on Thursday. Nevertheless, it remained in proximity to its January low of $1.0482. A breach below this level would lead to its lowest point this year. 

"If that (January low) goes then we could go a bit closer to euro/dollar parity, but our base case scenario is that unless there's another negative shock for Europe then that won't be sustained," Lee Hardman, senior currency analyst at MUFG, told Reuters.

Hardman said the euro was weakening, partly because of the stronger dollar on the back of higher U.S. yields and also because of "the cyclical divergence story: the U.S. economy has been more resilient while the European economy has been weaker." 
 

 

EURUSD forecast: Strong dollar streamrolls euro, “no reason” to fight bearish trend yet, analysts say 

Chris Turner, Global Head of Markets at Dutch bank ING, wrote that the euro will likely continue further on its bearish trajectory in his FX Daily overview on Thursday: 

“We can probably all agree that the dominant trend is a strong dollar. However, two developments this week warn that the euro may be due to some independent weakness. Italy pushing budget boundaries and some European Central Bank officials discussing large rises in Minimum Required Reserves (MRR). We think an MRR hike would be a clear Euro negative.

There seems no reason to fight this bearish EUR/USD trend just yet. But for today, keep a look out for German and Spanish inflation – in case it builds momentum for one last ECB hike. If not, expect EUR/USD to continue drifting to the 1.0400/1.0410 area.”

Turner’s ING colleague Francesco Pesole said the bank estimated the euro to dollar rate to bottom out at 1.02 should U.S. bond sell-off continue: 
 
 

“While we do see risks of US back-end yields staying high, and cannot exclude a 5.0% scenario for the 10-year tenor, additional bearish pressure at the shorter end of the USD curve may be curbed. A look at recent EUR/USD correlations suggests that the pair has responded to back-end US yields just as much as short-term swaps. All in all, we estimate 1.02 as the most likely bottom for EUR/USD in a scenario where the US bond sell-off continues.”

Analysts at Dutch multinational banking group Rabobank revised their EUR/USD forecasts on Thursday, and issued a projection similar toING, saying the euro to dollar rate would likely move to 1.02: 

“The USD is likely to remain well supported until the market has the confidence to move back into higher risk assets. In our view, this suggests that the USD is set to find support on safe-haven demand even as the US economy slows. As a result, EUR/USD could remain lower for longer.

Our forecasts for the Eurozone indicate technical recession for H2 and a slow recovery next year. The backdrop suggests scope for further downside pressure for the EUR. On the margin, rising concerns about the fiscal pledges of Italy’s right-wing government could also become a EUR negative factor since this has the potential to create tensions with Brussels going forward.

Having breached our former 1.06 target, we have revised our forecasts lower and now expect EUR/USD to move to 1.02 on a three-month view and remain lower for longer into 2024.”

In their latest FX Snapshot on September 25, analysts at Citibank Hong Kong were fairly optimistic in their euro forecast, saying the ECB would likely keep rates higher longer than the Fed, providing potential support for the single market currency in the longer term:    

"What still remains unchanged is the ECB’s rate cut trajectory as priced by OIS rates still remains much shallower than cuts priced for the Fed. More importantly, both the euro area and China look to be at a cyclical bottom currently while the US economic cycle seems to be peaking.

All these factors put together point to the ECB likely maintaining tighter financial conditions for longer than the Fed – this may be supportive of EURUSD or at least put a firmer floor at the current levels.”

Citi’s 3-month euro to dollar forecast was relatively bullish, considering the current rate of $1.059, placing the EUR/USD exchange rate at a potential average of $1.08. The 6-to-12-month forecast was bearish, suggesting that the euro to dollar rate could drop back down to $1.06, according to the bank.  
 
The bank's long-term projection for EURUSD was bullish, projecting the pair to recover and trade at a potential average of $1.20. 

A comment from UBS analysts cited by FXStreet indicated the currency pair may be dollar-dominated until year-end. UBS also added that the narrative of the Fed cutting rates before the ECB is questionable: 
 
 

“The near-term risks are skewed toward additional US Dollar strength.

Given the latest macroeconomic data, it has become questionable whether the Fed needs to cut policy rates before the European Central Bank. Hence, there is risk that the USD might gain further ground versus the EUR, and EUR/USD could slip back below 1.05.”

 

EUR/USD traded at $1.0534 at the time of writing, up 0.28% on the day. 

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. 

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