Eur/usd: Why the euro’s rise against the dollar is likely to continue

(BFM Bourse) – Research departments estimate that the dollar should weaken in the coming months. The euro could thus come into contact with $1.15 or even $1.20.

After alternating phases of declines and gains against the dollar this year, the euro has recently regained ground. Over the month, the eurozone currency recovered 1.7%

against the dollar, now trading at $1.1154 and even recently breached $1.1240, a level not seen since February 2022. And for the year as a whole, the euro is up nearly 4.2% against the dollar (and more than 9% over the year).

Beyond the euro, the DXY index, which measures the transatlantic currency’s performance against a basket of currencies, has fallen 2.8% since January 1.

>> Access our exclusive graphical analysis and familiarize yourself with the trading portfolio

Returning to the Euro-Dollar pair, the rally was mainly triggered last week by US inflation figures for June, which came in significantly below expectations, both in terms of the headline figure and the “core” index (excluding food and energy prices).

Changed market expectations

This prompted market operators to revise their expectations for rate hikes from the US central bank (Fed). If another rate hike next week of 25 basis points (0.25 points) already appears to be confirmed by the market – investors are 99.8% counting on this scenario, according to CME Group’s FedWatch tool – the debates are more open for the future. Also according to the FedWatch tool, operators attribute a more than 80% probability of a status quo on rates at the next meeting in September. The idea of ​​a drop during the year is even slowly starting to seem possible in the eyes of the market.

“This (last week’s inflation figure) may not prevent the Fed from raising rates another 25 basis points at the July 26 meeting, but it increases the likelihood that this will be the last rate hike of this cycle,” sums up payments specialist MoneyCorp.

It is also after these statistics that several analysts advised or confirmed to buy the euro against the dollar.

“US inflation is the last piece of evidence we have been waiting for to recommend a long position in the eurodollar. We are targeting $1.1500 per euro by the end of 2023,” Georges Saravelos, co-head of currency analysis at Deutsche Bank, said in a note published last week. The specialist also believes “quite possible” that the euro will move within a range of $1.15 to $1.20 by the end of the year.

UBS, for its part, expects a eurodollar of 1.14 at the end of December, then 1.16 at the end of March 2024 and 1.18 at the end of June of the same year.

Monetary policy divergence

Analysts’ expectations are mainly based on the fact that the slowdown in price increases shows that the US is now very close to the end of the monetary tightening cycle or even an upcoming rate cut, which is less the case for the Eurozone with the European Central Bank (ECB). “The period of uncertainty in which the markets have revalued the terminal rate (from the Fed, editor’s note) on several occasions should soon end,” UBS assessed. As a result, the Swiss bank’s forecast reflects the idea that “the dollar is expected to weaken as the Fed should start to ‘step on the brakes’ at the monetary policy level”, while “the ECB will remain restrictive”.

For Deutsche Bank, the process of disinflation, i.e. a fall in inflation (not to be confused with deflation, which corresponds to a general fall in prices) is “on the right track”. “We argue that the worst outcome for the dollar is a combination of lower US inflation and relatively stable growth conditions. In a world where supply is improving, these two phenomena can occur simultaneously,” the German establishment added.

However, a deterioration in the global economy, should it occur, could weaken the euro against the dollar, or more precisely strengthen the US currency, because the latter would benefit from its safe haven status. At least that is the hypothesis formulated by Capital Economics. The think tank believes that all developed economies are headed for a recession this year. This would penalize risky assets such as stocks, but also most currencies.

“Even the relatively mild recession that we foresee could therefore lead to a marked deterioration in investors’ risk appetite. This is why we continue to forecast rather poor results for equities until the end of the year and believe that the safe haven of the US dollar will recover,” expects Capital Economics.