Euro to Dollar Outlook: "Scope for more broad-based USD strength"

February 28, 2024 - Written by John Cameron

STORY LINK Euro to Dollar Outlook: "Scope for more broad-based USD strength"

The Euro to Dollar exchange rate (EUR/USD) was unable to hold above 1.0850 on Tuesday and edged lower later in the day despite weaker-than-expected US data.

EUR/USD retreated further to test 1.0800 on Wednesday with markets expecting near-term inflation data to support the US currency. The dollar also gained an element of defensive support as equity markets lost ground.

Month-end positioning, risk conditions and inflation developments will dominate in the short term with wider US trends crucial over the medium term.

According to Rabobank; “We continue to see the potential for EUR/USD to move towards 1.0500 on a three-month view before edging higher into year-end.”

There will be choppy trading over the next two days.

MUFG commented; “We are approaching month-end and that in itself could be the catalyst for a move with most financial news stories suggesting a bias for the US dollar to weaken.”

As far as inflation is concerned, the US will release the PCE prices data on Thursday.

This is a key Federal Reserve inflation gauge and there will be further concerns over underlying trends if the data is stronger than expected.

Consensus forecasts are for core prices to increase 0.4% on the month from 0.2% previously, although the year-on-year rate is still set to edge lower to 2.8% from 2.9%.

The Euro-Zone will also release the latest inflation data on Thursday and Friday.

Looking at the Euro-Zone, consensus forecasts are for the headline annual rate to decline to 2.5% from 2.8% with the core rate at 2.9% from 3.3%.

Danske Bank FX and rates strategist Mohamad Al-Saraf commented; “There's more chance of disinflation ongoing in the euro area, which perhaps could open the door for an earlier cut from the European Central Bank."

He added; "We think if inflation is stickier in the U.S. than it is in the euro area then the dollar has to be strong."

Rabobank also expects that the inflation data will continue to lead to slower than expected US rate cuts. According to the bank; “We see scope for more broad-based USD strength over the spring as the market continues to recalibrate the pace and timing of policy moves in the G10.”

Bank of America commented on the US outlook; “Only weaker services will start weakening the stretched labor market, eventually affecting wages and then inflation dynamics, with inflation expectations falling earlier, allowing central banks to start cutting rates. The strong USD should start to weaken in this case. We are not there yet.”

ING noted that US data has been contradictory. In this context, weaker consumer confidence data had limited impact.

It added; “It is another case of dislocation between soft indicators and the hard data which continues to paint a very tight picture for US jobs.”

ING noted that expectations of Fed rate cuts have continued to fade; “Despite all that, markets have continued to gradually scale back Fed easing bets, now at 78bp for 2024, which has helped the dollar move decisively higher in Asian trading amid a substantial cooling-off in risk appetite overnight.”

Risk conditions will be an important element for global markets and the dollar.

ING noted; The EUR-USD 2-year swap rate differential would be consistent with a softer EUR/USD if it wasn’t for the supportive equity environment of recent months.

In other words, if equity markets come under pressure, the Euro would be likely to lose significant ground.

There were significant losses in equities on Wednesday with S&P futures trading close to 0.5% weaker while the FTSE 100 index declined 0.65%.

Danske considers a potential win-win scenario for the dollar as it expects that the greenback will strengthen if equity-market gains are driven by Wall Street. It noted; “the catalyst for the rally in equities is centred on the US market, which, all else equal, attracts funds into the USD and over the longer run should be positive for the greenback.”

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TAGS: Euro Dollar Forecasts