Euro to Dollar Exchange Rate Outlook: "EUR/USD to rise to around 1.12" say Commerzbank

November 22, 2023 - Written by James Fuller

STORY LINK Euro to Dollar Exchange Rate Outlook: "EUR/USD to rise to around 1.12" say Commerzbank

EUR/USD Exchange Rate Retreats from 3-Month Highs Ahead of Fed Minutes

The US Dollar (USD) overall remained vulnerable during Tuesday, although it did manage to resist further heavy losses and secured a limited comeback on short covering ahead of the Fed minutes.

The dollar index dipped to 11-week lows just below 102.80 before a tentative recovery to just above 103.05.

The Euro to Dollar (EUR/USD) exchange rate also hit 3-month highs at 1.0965 before a retreat to 1.0925 towards the European close.

The US currency has been undermined by strong expectations that interest Fed interest rates have peaked and that there is scope for interest rate cuts by March 2024.

A stronger Chinese yuan also undermined the US currency.

The Chinese yuan posted significant gains on Tuesday with gains triggered in part by the central bank decision to set a significantly stronger than expected yuan fixing rate.

ING added; “Additionally, the PBoC drained liquidity when it did not need to, which could be read as a further attempt to squeeze out those holding short renminbi positions.”

There were also reports that state banks in China were in the market selling dollars.

ING added; “It is unclear how much lower Chinese authorities would like USD/CNY to be and local authorities cannot necessarily rely on a broadly soft dollar environment for long. But for the short term, we think these moves can lift the Asian FX bloc in general and add to the current soft dollar environment.”

There have been no major Euro-Zone developments during the day with markets focussing on the US economy and Fed policy.

US existing home sales declined to an annual rate of 3.79mn for October from a revised 3.95mn the previous month which was below consensus forecasts of 3.90mn and the weakest reading for over 13 years.

NAR chief economist Lawrence Yun, commented; "Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation."

Mortgage rates peaked at 7.79% in late October, the highest rate since November 2000 which will inevitably hurt demand in the housing sector.

Rates have, however, since declined to around 7.45%.

According to Pantheon Macroeconomics mortgage rates are "constraining discretionary listings of existing homes, because people can't afford to move."

ANZ is confident that the Fed won’t hike again; “For some time, we have believed the Fed is done with rate rises. Indeed, we think the real policy rate is sufficiently restrictive to bring inflation to the Fed’s 2% price stability target.”

Elisabet Kopelman, U.S. economist at lender SEB, added; "Strong risk appetite and speculation about future interest rate cuts are not a good environment for the dollar."

There are still doubts whether there is significant further short-term dollar downside.

According to UBS; “We expect the US Dollar to stay stable in the first months of 2024, due to robust US economic growth and high US interest rates relative to the rest of the world.”

It added; “With a sharp narrowing of yield differentials unlikely over this period, we expect a rangebound US Dollar for the first quarter of 2024 and before the USD resumes its weakening against the Euro, British Pound, Japanese Yen, and Swiss Franc.”

According to SocGen EUR/USD is likely to retreat from 1.0960, but pullbacks should find support near 1.0750.

It added; “Beyond 1.0960, next hurdle is expected to be at graphical levels of 1.1065/1.1080.”

On a longer-term view, Commerzbank expects further dollar losses. It notes; “We continue to expect the US economy to slide into recession in 2024 and the Fed to cut its key interest rate by a total of 150 bps in response. However, as the market still seems confident that the US economy will manage a ‘soft landing’, we, therefore, expect the EUR/USD pair to rise to around 1.12.”

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