Euro to US Dollar Outlook: Divergence Remains a Key Theme

May 19, 2024 - Written by David Woodsmith

STORY LINK Euro to US Dollar Outlook: Divergence Remains a Key Theme

Nordea forecasts that the Euro to Dollar exchange rate (EUR/USD) will weaken to 1.04 on a 3-month view with downside risks before a late-year recovery.

ING expects that EUR/USD will resist losses and trade at 1.10 at the end of 2024.

EUR/USD secured a net advance during the week and hit 5-week highs just below 1.09 during the week before settling around 1.0865.

ING expects narrow ranges to prevail in the near term; “We suspect this environment can continue for another month or so with probably symmetrical risks for EUR/USD from here. US activity data, including jobs, could start to slow, yet the US price data could stay sticky and limit Fed easing expectations.”

The main focus during the week was the US consumer prices release. The headline and core readings both came in at 0.3% from 0.4% the previous month.

Core data was in line with expectations with a slightly lower than expected headline reading.

The data overall provided measured relief over inflation trends and the dollar lost ground.

Nordea is still fretting over inflation trends with an impact on Fed policy; “To start lowering rates they need either more confidence on inflation returning to 2% or an unexpected weakening in the labour market. We don’t see either happening in the near future.”

It added; “With no slowdown in sight for the US economy, the Fed will need to see several months of even slower price data before cutting rates. September is probably too soon, and we now expect the first US cut in December whereas the ECB will start in June.”

According to Nordea; “We believe EURUSD will likely fall during the summer as it becomes clear that the ECB and Fed are on a somewhat different path when it comes to rate cuts.”

From a longer-term perspective, Nordea commented; “Eventually, a lower Fed funds rate will push EURUSD up even if the rate differentials between the USD and EUR are somewhat wider than today; we expect that a lower USD rate will reduce the appeal for the USD in an aggregate view. The risk however is for a periodically lower EURUSD than we have currently pencilled in.”

RBC sees support on dips; “Whenever EUR/USD gets to a 1.06 handle, we think it will keep running into good buying demand from European corporates and longer-term investors locking in hedges at attractive levels, acting as a brake on EUR downside.”

On interest rates it added; “Though we see the ECB starting well ahead of the Fed, we do not see them diverging much further than 200bps – not because they cannot but because if the conditions are such that if we see a reacceleration in US inflation, it is likely to spill over to the Euro area too.”

A limit to divergence should limit potential Euro selling.

The overall US and Euro-Zone economic outlooks will remain crucial, although political developments will also be increasingly important.

RBC Capital Markets looks at the November US Presidential election and noted its own survey of investors that suggested a Trump victory would be negative for the dollar.

This was based on the potential for the Administration to push for lower interest rates by the Federal Reserve and direct action to push the dollar weaker.

According to RBC; “Trump has limited power to force the Fed’s hand if sticky inflation warrants rates on hold. He cannot replace the Chair until Powell’s term ends in 2026.”

On currency policy it added; “Trump could push for a new Plaza Accord but outside Japan, it wouldn’t be straightforward to find support.

RBC also considers that tariffs on foreign goods are more likely to help than hurt USD.

According to the bank; “Our 2025 USD profile remains pretty flat. The biggest downside risk remains a US recession which is a tail risk rather than base case scenario.”

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TAGS: Euro Dollar Forecasts