MUFG: Euro to Dollar Rate Tipped to Strengthen to 1.14 by End-2024

January 8, 2024 - Written by Frank Davies

STORY LINK MUFG: Euro to Dollar Rate Tipped to Strengthen to 1.14 by End-2024

MUFG foreign exchange analysts forecast that the Euro to Dollar (EUR/USD) exchange rate will strengthen to 1.14 at the end of 2024.

On a shorter-term view, MUFG forecasts EUR/USD at 1.08 at the end of the first quarter and other banks are also less confident that EUR/USD can advance in the short term.

Scotiabank, for example, considers that there is a risk that EUR/USD will dip to below 1.0700.

From a longer-term perspective, Morgan Stanley has dropped its bullish dollar stance and is now neutral. It has also dropped its call of EUR/USD parity.

According to the latest Reuters poll EUR/USD is forecast to strengthen to 1.12 at the end of 2024 following a 3% gain in 2023.

EUR/USD posted significant losses to 1.0940 during the week from 1.1035 last week, but did find support below 1.0900.

Minutes from December’s Fed meeting cast doubts on an early rate cut, but there was talk that the programme of bond sales could end more quickly than expected.

ING commented; “Stressing conditionality seems inconsistent with March cut expectations, but the openness to a QT exit and concerns about the economy point the other way.”

The monthly employment report was stronger than expected with an increase in non-farm payrolls of 216,000 for December compared with consensus forecasts of 170,000, although the November increase was revised down to 173,000 from the 199,000 reported previously.

The household survey recorded no change in the unemployment rate from 3.7% compared with expectations of a small increase to 3.8%.

There was, however, a sharp drop in the participation rate and a huge decline in the number of employed people of close to 700,000.

Average hourly earnings increased 0.4% on the month with an annual increase of 4.1% from 4.0% previously.

The US ISM business confidence data for the services sector declined to a 7-month low of 50.6 from 52.7 previously and compared with expectations of 52.6.

The employment component dipped sharply to the lowest reading since July 2020 while the prices decline declined only slightly on the month.

The employment report overall is likely to cause significant confusion within the Federal Reserve and the central bank will want more data to assess the situation.

Following the ISM data, markets still priced in over a 65% chance of a rate cut at the March meeting while the chances of a May cut increased to over 90%.

There were sharp dollar swings following the data with the US currency initially strengthening sharply on the headline payrolls number before sliding after the ISM data and ending with marginal gains on the day with EUR/USD around 1.0940.

According to Rabobank; “The release of a stronger than expected US labour report this afternoon has served to underpin the view that Fed policymakers are likely to be more cautious than market pricing had been suggesting last month.”

According to ING; “Solid employment gains, low unemployment and sticky wages suggest no immediate need for Federal Reserve rate cuts. Nonetheless, the jobs market is cooling and the concentration of employment gains in sectors viewed historically as being lower paid and more part-time raises some concerns. We think the Fed will wait until May before cutting rates

The dollar index settled around 102.40 from 101.40 at the end of 2023.

ING added; “we have a conviction call that the dollar will be lower later this year and we would assume that anywhere above 104 in DXY will meet some good medium-term selling interest.”

According to MUFG; “There is scope for the US dollar to rebound over the near-term given the extent of rate cuts from the Fed now priced in the rates market.

MUFG added; “The likelihood is that the reversal of the monetary tightening will be reasonably synchronised this year with many central banks likely commencing rate cuts between March and June. That means Fed rate cuts are unlikely to drive the dollar sharply weaker.”

According to Credit Agricole; We further think that the USD will remain a buy-on-dips across the board ahead of the NFP data tomorrow as global investors continue to reassess their dovish Fed outlook.”

It added; “In contrast, the EUR could remain a sell-on-rallies given that any inflation re- acceleration could fan market Eurozone stagflation fears in a blow to the EUR.”

Brian Rose, senior economist at UBS Global Wealth Management commented; "In the short run, we think the dollar could gain a bit, mainly because we think the market is being too aggressive at pricing in Fed rate cuts, our base case is the Fed will wait until May before cutting."

He added; "We have seen the dollar rebounding a bit in recent days and the dollar could be stable or maybe a bit higher in the near term."

According to Scotiabank’s technical analysis; “the 6-hour chart suggests spot has developed a rough Head & Shoulders top since late December; a break under the neckline trigger at 1.0890 will activate the pattern and target a drop to the mid-1.06s.”

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TAGS: Euro Dollar Forecasts