Category: Forex News, News

Euro to Dollar Forecast for Week Ahead: Euro-Zone Political Fears Return

June 16, 2024 – Written by Tim Boyer

Foreign exchange analysts at MUFG sees the risk of the Euro to Dollar exchange rate (EUR/USD) sliding to 1.05 amid Euro-Zone political concerns.

Scotiabank considers that EUR/USD will struggle in the short term before gains to 1.15 at the end of 2025.

During the week, the Euro came under pressure after the European elections as President Macron called for early parliamentary elections after losing to the right-wing National Rally in the European vote.

In particular, there was strong selling in French bonds with a widening in the French bonds (OATS) and German Bonds (Bunds) yield spreads and EUR/USD retreated to 6-week lows close to 1.0670.

MUFG commented; “The wide on the spread in 2017 was 76bps (closing rate basis) which coincided with EUR/USD falling to around the 1.0600-level. That’s certainly very achievable and if risks increase notably we could certainly see EUR/USD test the 1.0500-level in the coming weeks.”

According to HSBC; “Concerns are growing over France’s budget deficit in the context of possible legislative control by the far-right National Rally party, with Finance Minister Bruno Le Maire warning that France could be pushed into a debt crisis if the National Rally were to pursue its economic program.”

It added; “For the EUR, political concerns look likely to persist and there is little sense of any market appetite to fade the move. We retain our open trade idea to sell EUR-USD, with a target of 1.0550.”

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ING does not expect near-term relief; “It looks as though European politics is going to be the dominant driver of FX markets for this month. This suggests international investors will need a lot of convincing not to hold dollars.” It added; “it seems clear that given French political risk, EUR/USD will not lead in any further dollar data-driven decline.”

Credit Agricole considered that political uncertainty could undermine the economy and trigger fresh concerns over the potential for Euro-Zone fiscal and financial integration.

The Federal Reserve held interest rates at 5.50% at the latest policy meeting, in line with consensus forecasts.

Chair Powell continued to warn that interest rates could not be cut until there was more convincing evidence that inflation was moving to the 2% target.

The inflation data was more favourable with the core annual rate for consumer prices declining to 3.4% from 3.6% and below expectations of 3.5%.

Danske commented; “The Fed is still biased towards easing and Powell underscored the need to remain conscious about downside economic risks as well. We remain happy with our call for two 25bp rate cuts this year, followed by four more in 2025.”

It added; “We think EUR/USD will range trade around the 1.08 level in the near term, but in the longer term, we believe the structural case for stronger US growth dynamics will take the cross lower towards 1.05/1.03 on a 6/12M horizon.”

JP Morgan expects some Euro resilience; “for a larger sell-off towards 1.03 would require US/EMU inflation trajectories to diverge further or EMU growth momentum to be disrupted once again.”

Berenberg commented; “For the summer, we expect the EUR/USD to continue to move within this trading range with low volatility and no movement outside the trend channel is expected. Should the EUR/USD break out in one direction, the next support lies at 1.0450 (12-month low) and the next resistance at 1.1140 (6-month high).”

It added; “In the long term (around five years), the risk of high US government debt and possible problems in refinancing the debt must also be kept in mind. A significantly weaker US dollar then appears possible.”

The bank expects that the Euro-Zone economy will strengthen gradually, but pointed to the international dimension.

In this context, it added; “geopolitical risks such as the tensions between China and the US regarding Taiwan could resurface at any time and are always present. In uncertain times, investors seek safe havens such as the US dollar. Coupled with higher interest rates for longer, however, we believe a significant weakening of the US dollar above 1.1000 by the end of 2024 is unrealistic.”

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