Euro to Dollar Rate Still Eyeing the 1.10 level

December 21, 2023 - Written by Tim Boyer

STORY LINK Euro to Dollar Rate Still Eyeing the 1.10 level

The US Dollar (USD) posted gains against the Euro (EUR) ahead of Wednesday's New York open and again after the stronger-than-expected US consumer confidence data.

The US currency, however, failed to hold the gains as markets continue to back an early interest rate cut by the Federal Reserve.

The Euro to Dollar (EUR/USD) exchange rate found support below 1.0950 and traded around 1.0965 into the European close.

The PCE prices data on Friday will be the next test for market sentiment.

The dollar was also weighed down by seasonal pressures and expectations of position adjustment into the new-year trading period.

US consumer confidence posted a strong gain to a 5-month high of 110.7 for December from a revised 101.0 the previous month and compared with consensus forecasts of a smaller improvement to 103.8.

According to Dana Peterson, Chief Economist at The Conference Board; "December's increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months."

Existing home sales increased slightly to an annual rate of 3.82mn for November from 3.79mn and above market expectations of 3.77mn.

This was, however, still close to the lowest level since 2010.

NAR Chief Economist Lawrence Yun commented; "The latest weakness in existing home sales still reflects the buyer bidding process in most of October when mortgage rates were at a two-decade high before the actual closings in November.”

He added; "A marked turn can be expected as mortgage rates have plunged in recent weeks."

According to Freddie Mac, the 30-year fixed-rate mortgage rate has declined to 6.95% in the latest week from 7.03% previously and the first reading below 7.0% for over four months.

Although the data was stronger than expected, there was no significant shift in money-market rates.

Markets were still pricing in close to a 100% chance that there will be an interest rate cut at the May policy meeting.

The US 10-year yield was also around 3.90% which sapped potential dollar support.

According to Scotiabank; “With the holidays approaching, month-end flows may be a factor for markets a little earlier than usual; strong gains for US equity markets this month suggest that passive hedge rebalancing flows will run against the USD, adding to downside pressure in the short run

MUFG commented; “If an upside surprise does not materialise, it will be difficult for the Fed to thwart expectations of a March rate cut which will reinforce the dollar selling momentum, possibly through the quiet holiday period and into the start of 2024.”

The ECB has resisted any shift in rhetoric.

According to Bundesbank President Nagel; "We must initially remain at the current interest rate plateau so that monetary policy can fully develop its inflation-dampening effect."

He added; "I would say to everyone who is speculating on an imminent interest rate cut: be careful, some people have already miscalculated that."

Nagel did concede that interest rates had peaked.

Scotiabank; “Market bets—currently—that the Fed is more likely to blink first among the major central banks looking to ease next year continues to drive sentiment support in favour of the EUR.”

According to Danske Bank; “In the near term, we still see good opportunities for USD weakness on the back of the considerable easing of financial conditions over the past month, in conjunction with bearish USD year-end seasonality.”

It does, however still consider that the underlying fundamentals will undermine the single currency. It adds; “We expect EUR/USD to trade at lower levels on a 6-12M horizon based on relative terms of trade, real rates (growth prospects), and relative unit labour costs.”

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TAGS: Daily Currency Updates Euro Dollar Forecasts