Euro to Dollar Outlook: 1.15 by 2025, 1.18 by 2026

December 24, 2023 - Written by David Woodsmith

STORY LINK Euro to Dollar Outlook: 1.15 by 2025, 1.18 by 2026

Currency strategists at Rabobank expect the Euro to Dollar exchange rate will weaken to 1.05 on a 3-month view and will be held to highs of 1.12 over the next two years.

BNP Paribas, however, expects EUR/USD will strengthen to 1.15 at the end of 2024 and 1.18 at the end of 2025.

Euro (EUR) at Four-Month Best Against US Dollar (USD) into Festive Period

The US Dollar lost ground during the week and EUR/USD strengthened to 4-month highs at 1.1040.

According to Scotiabank; “Late November/December price action has developed a bullish Head & Shoulders continuation pattern, with the neckline trigger at 1.1010 activated today. The pattern implies roughly 290bps of upside potential in spot over the next 6-8 weeks— effectively a retest of the July peak (plus a bit more).”

The July peak was just above 1.1270.

The US PCE prices index declined 0.1% for November compared with expectations of no change for the month with the year-on-year increase slowing to 2.8% from 2.9%.

Core prices increased 0.1% on the month and the October increase was also revised lower to 0.1% from 0.2%.

The year-on-year rate declined to 3.2% from a revised 3.4% previously and below expectations of 3.3%.

According to MUFG; “the data means that the 6mth annualised gain will fall to the Fed’s 2% target level and will be another powerful indication that the inflation problem and the view that underlying inflation pressures were “sticky” is simply no longer the case.”

Danske Bank expects the US and Euro-Zone economies will both struggle; “In the euro area, growth momentum is fading at a faster pace compared to the US. Overall, we think both regions exhibit late-cycle dynamics, and hence we expect that growth and inflation will moderate in both regions throughout the first half of 2024.”

On a near-term view, Danske Bank considers; “The considerable easing of financial conditions over the past month, in conjunction with bearish USD year-end seasonality, could provide some support to EUR/USD over the next couple of months.”

Nevertheless, it still expects that Euro support will gradually fade during the year amid weak Euro-Zone fundamentals.

Nordea considers that there is a high risk of the Fed moving too early and being forced to reverse course; “We believe it would take just 100bps of cuts to make the economy grow above trend and for inflation to stop falling. At that point, the Fed will probably stop reducing rates, and might even return to hiking.”

The bank added; “The Fed is gambling that the inflation problem is already solved with goods price growth back to zero and wages having come down from the highs. But this bet could easily backfire.”

Rabobank continues to point to the importance of growth differentials; “Our expectation that the Eurozone is likely to print a second consecutive quarter of negative growth in Q4 appeared to come a step closer at the end of last week with the publication of very poor PMI data for Germany and France.”

It expects weak growth will force an ECB U-turn.

BNP noted the battle around the 1.10 level; “We believe a break above is likely and sustainable over the medium-term, with a view for interest rate differentials to shift in favour of the pair (as the Fed cuts more than the ECB), and as we expect global investors to rebalance away from the USD, diversifying their overweight USD risk accumulated in an era of negative interest rates and QE in Europe.

Goldman Sachs has made big changes to its forecasts for US interest rates; “With the FOMC seemingly putting more weight on an improving inflation picture, we are incorporating that scenario more squarely in our forecasts.

It now expects five rate cuts in 2024 from one previously.

Goldman also expects that ECB will be forced to shift its policy stance, limiting scope for dollar losses.

Nevertheless, the bank now forecasts EUR/USD at 1.10 in 6 month and 1.12 in 12 months compared with 1.06 and 1.10 respectively previously.

HSBC expects that the ECB will be forced to pivot sooner than expected; “Weak growth and a sharp deceleration of inflation suggest that the ECB may be closer to a pivot than it vocalised after the December policy meeting. A dovish convergence towards market pricing would likely weigh on the EUR.”

HSBC forecasts that EUR/USD will slide to 1.02 by the second quarter of 2024.

According to Rabobank; “Weakness in the German economy is likely to weigh on the outlook for the EUR through the next business cycle and beyond.”

Rabobank adds; “On a 12–24-month view, we see EUR/USD as more likely to trade a 1.02 to 1.12 range, which is well below most model based estimates of fair value, than to push back above the 1.20 level.”

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TAGS: Euro Dollar Forecasts