Euro to Dollar Outlook: Is a move towards 1.12 on the radar asks Scotiabank

December 15, 2023 - Written by Frank Davies

STORY LINK Euro to Dollar Outlook: Is a move towards 1.12 on the radar asks Scotiabank

EUR/USD Exchange Rates Jump to 2-week Highs as ECB Rejects Talk of Lower Rates

The dollar remained under pressure on Thursday and the Euro strengthened after the ECB policy decision.

Given this combination, the Euro to Dollar (EUR/USD) exchange rate jumped to 2-week highs fractionally below 1.1000 before settling around 1.0980.

The ECB policy decision met expectations on Thursday, but bank President Lagarde pushed back against market expectations and the Euro posted gains against major currencies.

US data releases were stronger than expected, but this provided only very brief dollar support and the US currency quickly retreated again as it extended heavy losses seen after Wednesday’s Federal Reserve policy statement.

According to ING; “Over recent months, we have been forecasting EUR/USD to end the year somewhere near 1.07. After last night's Fed shift, we expect EUR/USD ends the year closer to 1.10 now.”

The ECB held interest rates at 4.50% at the latest policy meeting which was in line with consensus forecasts.

According to the bank; “Underlying inflation has eased further. But domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.”

It added; “Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.

Over the second half of the year, the ECB intends to reduce the PEPP portfolio by €7.5 billion per month on average.

Bank President Lagarde stated that there had been no discussion of rate cuts at the meeting.

According to Lagarde; "Should we lower our guard? We asked ourselves that. No - we should absolutely not lower our guard."

Lagarde did state that the inflation path is flatter than before, lessening the risk of expectations becoming unanchored.

According to the ECB, risks to the growth outlook were still tilted to the downside.

The bank expects that headline inflation will average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026.

The inflation rate is, therefore, set to be slightly above target in 2025.

According to ING; “These forecasts would not justify aggressive rate cuts next year."

It added; "For now, we still think that the ECB's shift to full dovishness will be more gradual than markets are pricing in. Today’s policy announcements and the staff projections nicely confirm this."

According to Mark Wall Chief European Economist at Deutsche Bank; "Getting the PEPP announcement out of the way now reduces the hurdle to earlier rate cuts in 2024. While the PEPP exit makes it appear like the ECB is not shadowing the Fed’s dovish pivot, it may have subtly opened the door."

Quilter Cheviot Head of Fixed Interest Research Richard Carter commented; "Higher for longer will continue to be the message, but in Europe that narrative is likely to be tested to the max and we could easily see it have to pivot first out of all the developed central banks."

US retail sales increased 0.3% for November compared with consensus forecasts of a 0.1% decline while core sales increased 0.2% on the month.

Initial jobless claims declined sharply to 202,000 in the latest week from 221,000 previously while continuing claims increased to 1.88mn from 1.86mn.

According to Kathy Bostjancic, chief economist at Nationwide, market caution is needed; "The resilience of the consumer provides credibility to the Fed achieving a soft landing, but should also be a signal to markets that the Fed is not likely to cut rates as quickly and as much as the markets now have priced in."

Although the data overall was stronger than expected, Treasuries maintained a strong tone with the 10-year yield sliding to 4-month lows just below 3.95%.

According to Scotiabank; “Spot gains through 1.0950 intraday target a retest of the November high at 1.1020 at least and will put a move towards 1.12 on the radar.”

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