Euro-Dollar "Should Pressure Upper 1.08s in the Short Run" say Scotiabank

January 17, 2024 - Written by Tim Boyer

STORY LINK Euro-Dollar "Should Pressure Upper 1.08s in the Short Run" say Scotiabank

Dollar Pares Gains After Shock US Survey, EUR/USD Attempts to Recover from 1-Month Lows

The dollar posted net gains into Tuesday’s open with weaker risk appetite and higher US yields.

Although it remained in positive territory, there was a retreat from intra-day highs after a shock US data release.

The Euro to Dollar (EUR/USD) exchange rate dipped to 1-month lows fractionally below 1.0875 before a limited rebound after the latest US data.

The New York Empire manufacturing survey plunged to -43.7 for January from -14.5 previously. This was the weakest on record excluding the 2020 coronavirus plunge and compared with consensus forecasts of -5.0.

There was also a major downturn in the new orders and shipments components for the month.

Other elements were less extreme with a soft tone while prices paid increased faster but prices received increased at a slower rate for the month.

Companies were more optimistic over the 6-month outlook with price pressures expected to increase.

Richard Deitz, Economic Research Advisor at the New York Fed commented; “While the survey’s headline index has fluctuated in recent months, this outsized drop suggests January was a difficult month for New York manufacturers, with employment and hours worked also contracting.”

The overall risk tone has remained more fragile during the day with equities losing ground.

The dollar also gained an element of support from underlying concerns surrounding the Middle East situation.

Markets are still pricing in a 75% chance of a March Federal Reserve rate cut.

ING focussed on comments by Fed Governor Waller; “We presume today that he will stick to that same core message of successful disinflation and will not want to get involved in the fine-tuning of discussing a 2024 easing cycle, but not starting in March. We thus see event risk as a benign one – slightly negative for the dollar and positive for risk.”

On the Euro side, the German ZEW economic confidence index strengthened to an 11-month high of 15.2 for January from 12.8 and compared with expectations of 12.0.

There was, however, no improvement in the current conditions component, dampening any improvement in sentiment towards the Euro-Zone economy.

MUFG commented; “The easing of the energy price shock in the euro-zone has been an important driver of the euro’s recovery from the lows prior to last winter.”

MUFG also noted relatively hawkish ECB rhetoric over the past few days.

According to Bundesbank President Nagel “maybe we can wait for the summer break or whatever but I don’t want to speculate. I think it is too early to talk about cuts”

MUFG added; “With the US rate market still confident that the Fed could begin to cut rates by the end of this quarter, the ECB’s relatively hawkish policy stance is encouraging short-term yield spreads to move in favour of a higher EUR/USD rate. Our short-term valuation model estimate has just moved above the 1.1000-level.”

In contrast, Rabobank head of FX Strategy Jane Foley, maintains a negative stance towards the Euro, primarily due to difficulties in the German economy.

It noted; "With budget cuts coming, it doesn't look good for the German economy in terms of growth for the year ahead.”

According to Scotiabank; “Bearish trend momentum is picking up on the shorter-term studies and spot should continue to pressure the upper 1.08s in the short run.”

It added; “A clear break under 1.0870 neckline would tilt the balance of risks to more EUR losses in the near-to-medium term towards the mid/ upper 1.06s.”

According to SocGen; “The Dollar will not fall this year because Europe is doing really well, or because the US is weak. It will fall (modestly) because the Fed will cut rates and the currency is coming down from a very great height.”

The bank added; It’s worth remembering that January has been its worst month on average since inception, and the Dollar’s best over the same period. Euro bulls don’t have any reason to cheer the passing of Blue Monday.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Euro Dollar Forecasts