June 9, 2024 – Written by Frank Davies

STORY LINK EUR/USD Forecast, News: US Data Derails the Euro Exchange Rates

MUFG forecasts that the Euro to Dollar (EUR/USD) exchange rate will strengthen to 1.12 by March 2025.

Barclays, however, is still expecting a retreat to the 1.05-1.06 area this year.

EUR/USD was resilient after the ECB rate cut, but posted sharp losses after stronger than expected US employment data with a slide to near 1.08 from 1.09.

US non-farm payrolls increased 272,000 for May, much higher than consensus forecasts of around 180,000 with a small downward revision for April to 165,000 from 175,000.

The household survey was weaker as the unemployment rate increased to a 2-year high of 4.0% compared with expectations of no change at 3.9%.

The survey also reported a decline in employment of over 400,000 for the month.

Average earnings increased 0.4% compared with forecasts of 0.3% with a year-on-year increase of 4.1%, above expectations of 3.9%.

The wages and payrolls data sparked renewed inflation fears and fresh doubts over Federal Reserve rate cuts. According to markets, the chances of September cut dipped to near 50%.

Jane Foley, head of FX strategy at Rabobank sees limited scope for dollar losses; “We think U.S. inflation could be picking up again by the middle of the year and the Fed easing cycle could be really very short, almost irrespective of when it does commence.”

She added; “That means even though the dollar will give back some ground, when the Fed starts to cut, the dollar is likely to remain relatively firm. It’s not going to give back an awful lot of this year’s gains and it’s going to remain overvalued.”

MUFG is still sceptical over the US currency; “In recent months we have highlighted the scope for a period of decline in EUR/USD but we are now becoming more confident that window may have closed and see increasing upside risks for EUR/USD. Macro conditions are more favourable, the euro-zone external position has improved and we do not see scope for divergence and continue to see a similar trajectory for monetary policy for the ECB & the Fed.”

According to BNP, the dollar will maintain pole position; “For the USD to weaken, we believe we would need to see a significant deterioration in the US labour market, eurozone data surprising to the upside or Joe Biden gaining a substantial lead in the polls ahead of the US election.”

BNP commented; “while PMIs indicate that momentum in the eurozone is positive, the absolute growth differential against the US remains wide.”

CIBC added; “Although we are revising down our USD forecast slightly for some pairs on domestic stories, we continue to see USD dips as buying opportunities into the next quarter.”

The bank does expect that the dynamic will shift eventually; “over the medium term, this dynamic should flip, as highly rate sensitive economies process higher rates more quickly and rate cuts are realized. At this point, US data may begin to underperform relative to the other G10s, and the USD should come off as a result. We’re expecting this dynamic to be a story for 2025.”

Barclays looks at the global dimension; “the news and data flow from China is not living up to bulled-up expectations, as evidenced in May’s official PMIs across Manufacturing and Construction. Along with lingering geopolitical and US election risks, this points to further underperformance for EURUSD.”

The ECB cut all interest rates by 25 basis points at the latest meeting with the refi rate lowered to 4.25% from 4.50%.

The ECB was still relatively cautious over the inflation outlook with the 2025 forecast above the 2.0% target and suggested that there would not be another near-term cut, although it did not provide clear guidance on the outlook.

According to MUFG; “We see nothing in today’s announcement to alter our view of an easing cycle aligned with cuts taking place at each forecast meeting and hence expect the next cut to come at the meeting on 12th September.”

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TAGS: Euro Dollar Forecasts