Euro to Dollar Exchange Rate Drifts Lower Ahead of US Inflation Data

January 10, 2024 - Written by Frank Davies

STORY LINK Euro to Dollar Exchange Rate Drifts Lower Ahead of US Inflation Data

The Euro to Dollar (EUR/USD) exchange rate was unable to make further headway on Tuesday and gradually retreated to 1.0915 around the Wall Street open.

The 10-year yield moved back above 4.00% and equities retreated which limited any risk of further dollar selling and EUR/USD was in no shape to test 1.10.

The US NFIB small-business confidence index rose to 91.9 in December from November’s 90.6. It was the first increase since July, but the index has been below the long-term average of 98 for two years.

The share of owners reporting inflation as their main concern rose to a seasonally adjusted 23% from 22% the previous month, maintaining concerns over inflation trends.

According to ING, over the next month or so seasonal factors may keep EUR/USD in check. We retain a forecast of 1.08 for the first quarter of 2024, and EUR/USD has recently been more led by equities than by rate differentials.”

It added; “We expect EUR/USD to consolidate in a 1.0880 to 1.1020 range near term and await Thursday's CPI data for the next big input to the story.”

MUFG also noted the importance of US consumer prices data; “The next important data release in the week ahead will be the latest US CPI report December.

It added; “A much stronger CPI report (core > +0.3%M/M) for December would be required to challenge current expectations that inflation continues to slow back towards the Fed’s target.”

At this stage, markets are still pricing in around a 63% chance of a March rate cut.

Scotiabank noted the risk that Fed bets could be scaled back; “Look for more range trading in the majors in the short run but the window for a USD rebound remains open over the next few weeks as markets reprice March Fed easing bets.”

Bank of America senior G10 FX strategist Kamal Sharma expects bond markets will be pivotal; "It's not really been a straight line for the dollar this year, which is largely taking its lead from the developments in U.S. fixed income markets."

He added; "The market is still trying to find its feet in terms of the trajectory and timing of the first U.S. rate cut."

Bank of America expects a first rate cut will be delivered in March and also considers that risk trends will be a key element.

According to Sharma; "Our base case scenario is for a soft landing, lower dollar, and bull steepening, and that broadly should be supportive of risk assets more generally."

Euro-Zone trends will also be important for market direction.

The ECB noted on Tuesday that Euro zone services activity could weaken further in the coming quarters due to rising interest rates but the impact on the sector may be more muted than on manufacturing.

Jussi Hiljanen, head of rates strategy at lender SEB, commented; "I don't see anything to suggest here and now that the ECB is going for a rate cut in March they could still do it but it's very uncertain."

Scotiabank also expects ECB resistance to rate cuts; “Eurozone Unemployment matched the lowest level on record in November (6.4%). Very tight labour market data will bolster the ECB’s conviction to hold fast on its policy rates for the foreseeable future.”

In this context, it added; “Outside of a move back above 1.10, the short-term trend in spot remains lower—albeit amid slack trend momentum.”

According to Socgen; “Maybe the fact there are no further major German data releases this week means the damage has been done for now and if EUR/USD holds above 1.09 today, it has a chance to push back above 1.10 this week.”

Nevertheless, it added; “the more obvious conclusion is that we won’t get back to December’s 1.1140 peak without better German news or a significant deterioration in US data.”

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TAGS: Euro Dollar Forecasts