Euro to Dollar Exchange Rate Outlook: Sell at 1.0576, say HSBC Strategists

October 29, 2023 - Written by James Fuller

STORY LINK Euro to Dollar Exchange Rate Outlook: Sell at 1.0576, say HSBC Strategists

Foreign exchange analysts at HSBC remain negative on the Euro to Dollar (EUR/USD) exchange rate and recommend selling it at 1.0576 with a target of 1.0220.

Danske Bank remains negative on the Euro over the medium term with a 12-month forecast of 1.03, but sees scope for a rally to 1.0800 on a near-term view.

According to HSBC; “The main headache for the EUR is the unpleasant growth/inflation mix which the Eurozone economy faces. The activity data disappointments continue to mount, which is remarkable given there has been a paring back of growth expectations for the Eurozone on an ongoing basis.”

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

The central bank 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 through monetary transmission with weaker demand helping to curb inflation pressures.

According to the statement, governing council decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.

Bank President Lagarde refused to say that rates have peaked, but the market is confident that this is the case.

According to Nordea; “Today’s message is fully in line with our view that the ECB is done in terms of hiking rates. Depending on the incoming data, some of the more hawkish Governing Council members may make a final attempt at pushing through a hike at the December meeting, but we expect such endeavours to be unsuccessful.

Markets expect that the ECB will cut interest rates next year.

Nordea added; “We still estimate the ECB could start to cut rates next June, though the exact timing remains quite uncertain.”

Nomura expects that the net tone central bank rhetoric will support the dollar.

Our base case remains that the Fed will not deliver an additional rate hike in the November FOMC meeting; however, we believe its pause will be more hawkish than Thursday’s ECB announcements.

Nomura also cites further factors which will undermine the Euro.

According to the bank, the deterioration in global market risk sentiment from higher bond yields will be a negative factor.

A related factor will be energy prices with the Euro vulnerable if Middle East tensions put further upward pressure on oil prices.

Although there is some evidence of stabilisation in China, Nomura does not expect this will be sufficient to offset other negative factors.

Nomura is also concerns over the risk of a further widening in in yield spreads between German and Italian bonds.

On the US side, the bank considers that the election of a House of Representatives Speaker will lessen the risk of a government shutdown.

In this context, it adds; We maintain our forecast that EUR/USD will fall to 1.02 by year-end.

The US data flow overall has remained firm with annualised GDP growth of 4.9% for the third quarter from 2.1% previously while jobless claims have remained low.

The core PCE prices index increased 0.3% for September with the annual rate at 3.7% from 3.8% previously and in line with consensus forecasts.

HSBC takes a similar view surrounding adverse fundamental developments in the Euro area. According to the bank; “This bearish sentiment on the EUR underlines the broader uncertainties surrounding the Eurozone's economic recovery and the challenges policymakers might face in addressing them.

Morgan Stanley expects US interest rates have reached their peak and also expects that the Federal Reserve will hold rates at elevated levels during 2024.

The bank expects that a lack of confidence in the Euro-Zone and widening yield spreads will continue to underpin the dollar over the remainder of 2023.

HSBC also expect a higher for longer message; “while markets are currently pricing in the first policy rate cut in July 2024, we expect the Fed to reinforce the messaging at the upcoming November FOMC, that a first cut is somewhat distant.”

Danske Bank still sees scope for the Euro to secure near-term relief as some pessimism surrounding the global economy eases.

It adds; “The risks primarily consist of an escalation in the Middle East, leading to both a risk-off sentiment and higher energy prices, resulting in a stronger USD.”

Bank of America notes an important element of uncertainty, but short-term fundamentals will continue to support the dollar; “While the Fed has expressed caution, it similarly continues to express data dependence and the possibility that the inflation fight is still far from over. Meanwhile, US data continues to defy gravity, which has been one of the key factors behind the rapid rise in back-end UST yields.”

According to MUFG; “EUR/USD remains resilient but we still see scope for a more sustained break below 1.0500 but maintain that levels below parity are unlikely.”

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TAGS: Euro Dollar Forecasts