May 8, 2025 – Written by David Woodsmith
STORY LINK Euro to Dollar Forecast: “Remains Range Bound” Between 1.12-1.15
The Federal Reserve’s refusal to consider any near-term cut in interest rates has supported the dollar in global markets with the Euro to Dollar (EUR/USD) exchange rate trading around 1.1300 from 1.1270 lows.
The dollar is still being hampered by fragile underlying confidence.
ING commented; “We think there will be sustained support around the 1.1250-1.130 area in EUR/USD in the near term.”
According to Scotiabank; “EURUSD remains range bound, and its movement since mid-April has been limited between support in the mid-1.12s and resistance above 1.15.”
The Euro could gain some support if the trumpeted UK-US trade deal is short on content.
On a longer-term view, Natixis has an end-2025 EUR/USD forecast of 1.20; “As we anticipate a technical recession in the US economy, the dollar will resume its decline, given that it remains overvalued in terms of real effective exchange rates.”
The Federal Reserve held interest rates at 4.50% at the May meeting, in line with strong consensus forecasts.
Chair Powell commented that inflation and unemployment are both likely to increase due to the impact of tariffs.
Powell repeated recent commented that the inflation and employment goals are liable to be in tension which will make it difficult for the central bank to set policy.
His key message, however, was that the Fed needed to be patient and wait for the economic data to judge the correct policy response.
Commonwealth Bank of Australia head of international and sustainable economics Joseph Capurso commented; “The FOMC does not want to pre-empt changes in the U.S. economy – it wants to wait for ‘hard’ economic data to guide its policy actions.”
He added; “From here, we expect communication from Chair Powell and other FOMC members to focus on making sure inflation expectations are anchored.”
There has been a sharp shift in market pricing with traders considering that the chance of a June rate cut has dipped to near 20%.
As far as US data is concerned, US initial jobless claims declined to 228,000 from 241,000 the previous week and slightly below consensus forecasts of 230,000 while continuing claims retreated to 1.88mn from 1.91mn.
According to ING; “Another hold from the Federal Reserve with an acknowledgement that uncertainty has increased with more upside risk for both inflation and unemployment. This suggests little inclination to move until they are confident of the direction the data is heading, meaning rate cuts could be delayed, but risk being sharper when they come.”
MUFG took a similar view; “We expect the Fed to resume rate cuts when evidence emerges that the US labour market is loosening in response to trade disruption and heightened policy uncertainty supporting our outlook for further US dollar weakness in the 2H of this year.”
According to the bank; “A delay to Fed rate cuts may help to offer some much needed support for the US dollar in the near-term although the link with short-term yield spreads has broken down recently.”
ING noted that the dollar still trades with a sizeable risk premium.
It added; “In EUR/USD that translates into around 4% overvaluation in our estimates, but the path to make markets comfortable with a substantially smaller risk premium isn’t going to be smooth. A constant flow of positive news on trade risk de-escalation is necessary, but probably not sufficient in the face of the damage markets think tariffs are already inflicting on the US economy.”
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TAGS: Euro Dollar Forecasts
