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Euro forecast

Euro declines to lowest since mid-March on weak PMI data 


The euro (EUR/USD) continued its decline against the dollar on Friday, approaching the $1.06 level, which marked its lowest point since mid-March. The drop followed the release of disappointing Composite Purchasing Managers’ Index (PMI) data for the eurozone, as well as signals indicating that the European Central Bank (ECB) might halt its interest rate increases going forward. 

In September, the Eurozone PMI showed a slight uptick from 46.7 to 47.1. While this result was better than anticipated, it still indicates contraction, and does not alleviate concerns about a potential drop in GDP during the second half of the year. Total new orders saw the biggest decline in nearly three years. 

ING Senior Economist Bert Colijn commented on the new data: 

“To be fair, the PMIs are getting harder to read at this point. The slight tick-up from last month does end a streak of four consecutive declines in the composite PMI, but it remains firmly in contraction territory. While better than analysts had expected, the overall picture remains rather bleak on economic growth and adds to contraction concerns. Still, at least today’s PMI indicates that the deterioration of conditions has stopped for the moment.

Businesses are still working off old orders, which is keeping output reasonable right now. Still, that suggests a weaker outlook for the months ahead. With hiring slowing to a snail’s pace, concerns about activity in the months ahead remain. Our base case is for a continuation of very slow growth, more or less stagnation, which means that a quarter of negative growth is certainly imaginable.”

"A recession is becoming increasingly clear in the euro area,” added Christoph Weil at Commerzbank. “Unlike in the winter half-year of 2022/23, the economic weakness is not concentrated in Germany, which has suffered particularly badly from high energy prices.” 

Weil also noted that the increase in the ECB key interest rate by 450 basis points last week is slowing down the economy in all euro countries. 

Even though two years of stringent global policy tightening might have reached its highest point, major central banks have indicated their intention to maintain interest rates at whatever level necessary to combat inflation. This stance is now having a noticeable impact, particularly in Germany, Europe’s largest economy, where diminishing business activity points to a contraction owing to a sustained decrease in demand for goods and services. 

France's services sector experienced a more pronounced contraction in September, its PMI showed, as falls in both demand and new orders weighed on the Eurozone's second-largest economy. Chief Market Analyst Neil Wilson issued a short comment on the dynamics, stressing Germany’s low PMI reading: 

“French flash manufacturing PMI down to 43.6 from 46.0 before, services down to 43.9 from 46.0 before. Germany’s manufacturing PMI still below 40! But it was better than the previous month! EURUSD made a fresh 6-month low in the wake of the French data this morning before rebounding on the German.”

A week after its decision, a group of policymakers at the European Central Bank has voiced concerns regarding the potential for another interest rate hike, adding further pressure to the euro forecast. 
On Thursday, ECB policymaker Philip Lane suggested that companies were currently absorbing wage-related pressures, and there were signs of softening in the labor market. This indicated that the inflationary pressures stemming from wage hikes might finally be diminishing. 

"The contribution of unit profits to annual inflation in the first half of 2023 has moderated relative to its contribution in 2022, suggesting that the rising wage pressures are starting to be absorbed by firms," Lane said in a speech in New York. "Price hikes coming in below the increase in unit labour costs are projected to contribute further to the required disinflation during 2024. The labour market has so far remained resilient despite the slowing economy but shows signs of losing momentum.” 

Meanwhile, the U.S. Dollar index (USDX) rose above 105.5 on Friday — its highest level since early March — after the Federal Reserve (Fed) signaled that another rate hike still might be on the table. While the central bank maintained the target range for the federal funds rate at 5.25%-5.5%, the released projections in the dot-plot suggested the likelihood of one more rate increase later this year, followed by just two cuts in 2024.  Some commentators called the move a “hawkish skip” rather a “hawkish pause”. 
"This wasn't a 'pause,' it was a 'skip,'" Karl Schamotta, chief market strategist at Corpay in Toronto, told Reuters.  

"With the economy performing better than expected and inflation pressures remaining persistent, Fed officials chose to maintain a hawkishly data-contingent bias in this afternoon's statement and dot plot," Schamotta said. 


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EUR/USD forecast: Strong dollar weighs on euro 


Following the Fed’s decision, ING’s Global Head of Markets Chris Turner wrote

“This hawkish hold may well keep the dollar bid into October and it will have to be softer US activity data – particularly a rise in jobless claims or a decline in consumer confidence and retail sales – which will be required to soften up the dollar. Dollar bears will get no joy from the Fed.”

Analysts at Nordea added: 

"The dollar should be well supported toward the end of the year or until we start seeing softer data."

On September 22, Turner issued a bearish outlook for the EUR/USD pair: 

“EUR/USD remains under pressure as dollar strength dominates. The euro faces an event risk from today's releases of the flash PMIs for September. It really has been the PMI releases that have hit the euro since the summer. Despite all this pessimism about the euro, however, the ECB's trade-weighted euro is only 2% off its highs in July. This can probably be read as both the strong dollar being the dominant story and the eurozone's trading partners (Europe and China) faring as poorly as the eurozone.

For EUR/USD, an imminent turnaround looks unlikely and support at 1.0600/0610 looks the last barrier before what seems the more likely dip to the 1.05 area.”

ING’s EUR/USD forecast, updated today, now shows the euro to dollar rate trading at a potential $1.13 in the final quarter of 2023, before recovering to $1.16 in Q1 2024 and $1.14 in Q2 2024. 

In their latest FX Snapshot on September 18, analysts at Citibank Hong Kong said:   

“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 even more bearish than ING’s, placing the EUR/USD exchange rate at a potential average of $1.08, which could decline to $1.06 in 6 to 12 months’ time, according to the bank. 
Citi’s long-term EUR forecast, however, was bullish, projecting the EUR/USD pair to recover and trade at a potential average of $1.20. 

The EUR/USD forecast from Australian bank Westpac, last updated on September 22, saw the pair trading at $1.10 in December 2023, $1.11 in March 2024, and $1.12 in June 2024, indicating a sharp euro decline towards the end of the current year and a slow recovery into 2024 and 2025. 

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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