Euro to Dollar Rate Rallies from 6-Week Lows on Global Rate-Cut Bets

January 27, 2024 - Written by David Woodsmith

STORY LINK Euro to Dollar Rate Rallies from 6-Week Lows on Global Rate-Cut Bets

The choppy trend in currency markets continued in European trading on Friday with the Euro recovering from fresh 6-week lows to trade higher on the day.

Stronger equities and hopes for concerted interest rate cuts this year helped support the Euro in global markets with the dollar unable to capitalise on evidence of firm US growth.

The Euro to Dollar (EUR/USD) exchange rate rallied from lows just below 1.0815 to trade around 1.0880 after the New York open.

The dollar index settled around 103.50 while the Pound to Dollar (GBP/USD) exchange rate edged above 1.2750.

According to MUFG; “The near-term US dollar bias remains to the upside though and we look set to test and breach the year-to-date high in DXY recorded on Tuesday at 103.82.”

Oil prices edged lower on the day and there were notably strong gains for UK equities with the stronger risk tone helping to underpin the Pound and Euro.

ECB policymaker Kazaks said on Friday that the central bank was on the right path to lower inflation but patience was required before policy can be reversed.

According to Kazaks; “Cutting rates too early would be by all mean worse than waiting just a bit.

He added; “There’s the risk that inflation starts to come back and then one would need to raise rates much more.”

Fellow member Šimkus stated that there had not been a dovish shift at this week’s policy meeting. He added; “I am confident that the data will not support a rate cut in March.

Markets are pricing in over a 90% chance of a cut at the April meeting.

According to Scotiabank’s Shaun Osborne; “It is not clear (to me) that the ECB will have enough information to be certain that inflationary risks have peaked before April so June still looks more likely.”

Markets are now braced for next week’s Federal Reserve policy decision with forward guidance the key element.

The US PCE prices data recorded a 0.2% increase for December which was in line with consensus forecasts. The year-on-year rate declined to 2.9% from 3.2% and slightly below consensus forecasts of 3.0%.

The personal income and spending data was stronger than expected and, following the data, there was a slight adjustment in Fed pricing with the chances of a March rate cut dipping back below the 50% level.

MUFG commented on Federal Reserve policy; “The tone from Powell is likely to remain cautious on near-term rate cuts being delivered but just like with the ECB yesterday, a more favourable tone on inflation could be enough to keep alive expectations of a cut in March.

According to Capital Economics deputy chief US economist Andrew Hunter; "Core PCE inflation has been running at an annualized pace in line with the Fed’s 2% target for seven months now. This reiterates the message that there isn’t really any “last mile” of disinflation still to achieve and that, even with real economic growth still resilient, there is plenty of scope for the Fed to start cutting interest rates soon."

ING noted the favourable data releases; “Decent growth and benign inflation support the thesis that the Federal Reserve can make monetary policy less restrictive in an orderly manner and that, if the US economy does experience a recession, it will be a mild one.”

It added; “Equity markets seem happy to hold onto gains. The dollar does not know quite what to make of it. On the one hand, the mildly pro-risk sentiment should be a mild dollar negative. Yet, decent US growth plus rates falling faster in Europe than in the US are keeping the dollar mildly bid.”

Scotiabank added; “The EUR’s retest of the past week’s range extended a little below the 1.0820 base seen earlier this week but not by much and the positive price reaction since the dip to 1.0813 earlier suggests that the sideways range trade remains intact.”

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TAGS: Euro Dollar Forecasts