Minor Post-ECB Euro to Dollar Rate Bounce Fails to Convince Investment Banks

October 26, 2023 - Written by John Cameron

STORY LINK Minor Post-ECB Euro to Dollar Rate Bounce Fails to Convince Investment Banks

The US Dollar (USD) has been unable to make further headway against the Euro (EUR) after the latest round of data releases and ECB policy decision.

At the time of writing, the Euro to Dollar exchange rate (EURUSD) traded at 1.05303.

The overall economic dynamics will, however, continue to underpin the Dollar.

According to Rabobank; “We maintain a forecast of EUR/USD 1.02 on a three-month view.”

The ECB held the main refi interest rate at 4.50% following the latest council meeting which was in line with consensus forecasts.

This was the first decision to hold rates after 10 successive increases.

The decision was broadly in line with expectations and the market reaction was limited with the Euro to Dollar (EUR/USD) exchange rate traded around 1.0550 from 1.0525 lows.

The ECB stated that inflation is still expected to stay too high for too long and domestic price pressures remain strong.

Policy was, however, working as planned with weaker demand helping to curb inflation pressures.

It added that the governing council decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.

HSBC maintains reservations over the Euro-Zone outlook; “the eurozone economy continues to face an array of headwinds, including weak global trade, still-high cost pressures and the impact of tighter monetary policy.”

HSBC expects the ECB will resist pressure to cut interest rates and added; “we expect the deposit rate to remain on hold until gradual cuts begin in December 2024.”

President Lagarde stated that now is not the time for forward guidance and that decisions would be data dependent.

Nomura expects that economic developments will be decisive; “The ECB will focus more closely on the later stages of the transmission mechanism, and the extent to which its monetary policy and the effects on the financial economy are spilling over to the labour market, activity, and finally, consumer price inflation.”

ING doubts that markets will take much notice of hawkish rhetoric; “we do struggle a bit to imagine how Lagarde can convince markets another hike is still possible. The last two pieces of data available to the Governing Council, PMIs and the ECB’s Bank Lending Survey, were unmistakably dovish events.”

Rabobank maintains a negative Euro stance; “Despite the anticipated efforts by the ECB to promote a higher for longer outlook for European rates, in our view, the weakness of the Eurozone economy suggests scope for further downside pressure on the EUR.”

On the US side of the equation GDP increased at an annualised rate of 4.9% in the third quarter of 2023 from 2.1% the previous quarter and above consensus forecasts of 4.3%.

The PCE prices index came in at 2.4% from 3.7% and compared with expectations of 2.5%.

Initial jobless claims increased to 210,000 in the latest week from a revised 200,000 previously.

There were still expectations that the Fed would leave interest rates on hold in the short term, but the overall releases maintained expectations that rates would have to remain at a restrictive level for a prolonged period.

The 10-year yield was marginally lower at 4.93% following the data releases.

According to Rabobank; “The USD will likely continue to be buffered by the movement in US yields in the weeks ahead. That said, we would expect any surge in safe-haven demand to benefit the USD, even if this also drives down treasury yields.”

MUFG still sees scope for short-term dollar gains; “After the EUR/USD bounce on Monday, the move now looks more like a false breakout with the technical picture increasingly looking bearish for EUR/USD over the short-term. The window for USD strength that looked to be closing at the start of the week remains open for now.”

Scotiabank sees scope for only a slight Euro recovery; “The EUR appears heavily oversold on the intraday oscillators, which may account for the minor improvement off the daily low, but scope for gains looks limited in the short run.

It considers EUR/USD is vulnerable to test support at 1.0520 and 1.0490. Resistance is cited at 1.0595.

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TAGS: Euro Forecasts Euro Dollar Forecasts