Euro to Dollar Week Ahead Forecast: EUR/USD Waiting for a Fresh Narrative

March 3, 2024 - Written by David Woodsmith

STORY LINK Euro to Dollar Week Ahead Forecast: EUR/USD Waiting for a Fresh Narrative

Foreign exchange analysts at Bank of America are sticking to their forecast that the Euro to Dollar exchange rate (EUR/USD) will strengthen to 1.15 at the end of 2024.

In contrast, Danske Bank is still backing dollar strength with a 12-month EUR/USD forecast of 1.04.

EUR/USD was marginally stronger on the week, trading around 1.0830 in very narrow ranges.

Concerns over inflation have continued to underpin the dollar, but US data releases have been mixed and Euro-Zone inflation was higher than expected.

With a lack of major moves, investment banks have been able to stick to their views.

Danske Bank still expects EUR/USD to trend lower over the course of the year.

It notes; “Despite the recent positive risk appetite, driven by the global rally in equity markets, which strengthened EUR/USD for most of February, we ultimately view the equity rally as a net positive for the USD, as the catalyst for the rally is centred in the US market, attracting flows to the USD.

Danske also considers that a strong USD, coupled with tighter financial conditions, is a necessary condition for the Fed to sustainably achieve its inflation target of 2%.

It summarises; “Overall, we believe the US economy is in a stronger position relative to the euro area based on factors such as relative terms of trade, real rates, and relative unit labour costs. We forecast EUR/USD to reach 1.05/1.04 within a 6/12M horizon.”

According to Bank of America, Fed rate cuts will weaken the dollar; “Our core USD views remain intact. We see the USD broadly depreciating against most G10 currencies, with our end-year EUR-USD forecast of 1.15, as moderating inflation and eventual Fed cuts should allow the USD to move back towards equilibrium.”

HSBC noted reports that revisions to the US housing components within the consumer prices index could put upward pressure on inflation for the next few months.

At this stage, markets are still expecting three interest rate cuts by the Fed this year., but expectations could shift again on stronger than expected inflation.

HSBC added; “It would take five more FOMC members to move into the 50bp easing camp to make that the median projection for 2024 when the Fed releases its new dot projections in March.”

According to the bank; “In the EUR/USD pair, the 1.0700 level serves as crucial support, with potential upward movement capped at 1.0930 in the absence of significant ECB language changes. A break below 1.0700 could swiftly shift market focus towards the 1.0500 target.”

Socgen commented; “if it were to become clear in the months ahead that the Fed’s next move will be a hike, while the ECB’s will be to cut rates, then the FX market reaction will be substantial.”

Under that scenario, the Euro would fall sharply. It added; “A return to parity’ would be a clickbait title but would demand a painful revision to our forecasts! What are the odds of that? Not more than 25%, perhaps, but definitely more than 10%.”

Its baseline scenario is still a slight upward bias for the Euro.

Rabobank still sees fundamentals as favouring the USD and added; “We maintain our three-month forecast of 1.0500 and remain of the view that there is a higher chance of EUR/USD remaining in a 1.0400 to 1.1200 range over the next 18-24 months or so, than of the currency pair holding levels above 1.1500.”

MUFG considers that fiscal policy will be a source of dollar vulnerability. It notes; “IMF projections going forward show an average deficit in the US of 7.1% for the next five years through to 2028. The US is borrowing growth from the future and the net consequence of that is weaker growth going forward. The euro-zone deficit/GDP average in the same period is 2.25%. In the UK it’s 3.7%.

MUFG added; “So while the US has clear advantages when it comes to tech and when it comes to labour market flexibility it also has a big problem ahead – tackling unsustainable budget deficits that ultimately point to potentially higher levels of inflation, weaker GDP growth and a weaker US dollar.

The headline Euro-Zone consumer inflation rate declined to 2.6% for February from 2.8% previously, but slightly above consensus forecasts of 2.5%.

The core inflation rate retreated to 3.1% from 3.3%, but significantly above market expectations of 2.9%.

According to Commerzbank; “Upwardly surprising Eurozone inflation and a more or less synchronised entry of the Fed and ECB into the rate cut cycle should have a slight net positive effect on the EUR.”

Market expectations of an April rate cut have faded.

In the medium term, however, Commerzbank expects the dollar will dominate; “USD strength should be justified if (as we expect) the US will have a growth advantage over the Eurozone (and most Western industrialised countries) over our entire forecast period.”

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