Euro Outlook: "Dollar Bid Next Couple of Weeks, Then Turning Lower in March"

February 23, 2024 - Written by David Woodsmith

STORY LINK Euro Outlook: "Dollar Bid Next Couple of Weeks, Then Turning Lower in March"

The Euro (EUR) spiked higher after the French PMI business confidence data beat expectations with the Euro to Dollar exchange rate jumping to 20-day highs just below 1.0890.

The subsequent data was less convincing with particular concern over the German manufacturing sector.

Evidence of stronger inflation in the data also curbed optimism surrounding the potential for early global interest rate cuts.

In this context, EUR/USD retreated to near 1.0850, but still held a net gain on the day.

Overall risk conditions will also be important for major currencies with the dollar tending to lose ground if sentiment remains strong while the dollar will recover if equities come under pressure.

According to ING's Euro-Dollar near-term outlook; “EUR/USD is currently breaking above short-term resistance and looks like it wants to test the 1.0865/1.0900 area, but the case for any higher levels is yet to be made.”

Credit Agricole is still positive over the outlook; “we believe that as long as today’s PMI data corroborates the market view that the global outlook is improving and the Fed & BoE comments keep investors’ rate cut expectations in place, this could keep risk sentiment supported in a boost to high-yielding, risk-correlated currencies.”

The Euro-Zone PMI manufacturing index retreated to a 2-month low of 46.1 for the February flash reading from 46.6 previously and below expectations of 47.0.

The services-sector index, however, recovered to a 7-month high of 50.0 from 48.4 previously which was above expectations of 48.8 and the first time that the sector has not contracted since August 2023.

Business confidence improved for a fifth successive month to a 10-month high.

According to Norman Liebke; Economist at Hamburg Commercial Bank; “There is a glimmer of hope as the eurozone inches towards recovery. This is particularly noticeable in the services sector. The latest PMI print gives hope for a recovery in the eurozone, which is why we are sticking to our annual HCOB forecast of 0.8% for 2024.”

Input prices increased strongly and the increase in output prices was also the strongest since May 2023. Excluding the strong pressure over the past two years, the increase in services-sector prices was the highest since 2000.

The ECB will inevitably be looking at the prices data closely and the stronger rate of increase will be an important impediment to an early cut in interest rates.

Liebke added; “The latest HCOB PMI figures are likely to disappoint the ECB. This is entirely due to the labour-intensive services sector, which continues to struggle with rising wages. Our forecast remains that the ECB will cut interest rates for the first time in June.”

The Federal Reserve minutes from the end-January meeting were released on Wednesday.

Committee members were keen to emphasise that patience was required and it would be dangerous to cut interest rates too quickly.

MUFG commented; “The overall tone of the minutes appears better aligned with current US rate market pricing which is expecting the first rate cut to be delivered in June.”

According to ING; “Consistent with Fed Chair Jerome Powell's press conference at the time, the word 'confidence' was sprinkled liberally through the minutes, indicating that the Fed needs to be sure that inflationary risks have been extinguished before cutting rates back to some kind of neutral level – probably near 3%.”

ING added; “Our game plan here sees the dollar staying bid for the next couple of weeks and then turning lower in March on what should be a softer payrolls report and a softer February CPI figure. In early March we could also hear of some fresh China stimulus which would be a boon to the Rest of the World currencies.”

There are important US data releases later in the day.

According to Commerzbank; “if the figures are roughly in line with expectations, then things should not look too bad for the Euro today. On the other hand, if the US data casts even the slightest doubt on the current strong growth story, EUR/USD could rise further today.”

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TAGS: Euro Dollar Forecasts