Euro forecast: Pause in dollar rally offers relief to EUR

Negative U.S. jobs data scales back dollar in brief reprieve for euro, EURUSD trades higher

The euro to dollar rate (EUR/USD) rose 0.15% to trade above the $1.05 level on Thursday, after falling to its lowest level this year at $1.0448 on Tuesday. The single currency welcomed the reprieve after shedding over 14% of its value against the dollar over the past three months.

The pressure on the euro appears to persist as investors considered statements from several European Central Bank officials and reviewed U.S. labor market data.

Mario Centeno, a member of the European Central Bank’s (ECB) Governing Council, suggested that the central bank's series of interest rate hikes had likely come to an end, citing diminishing inflationary pressures across the eurozone. "We can expect that the rate cycle has been completed by now, and with present conditions," he told reporters in Lisbon.

He said the ECB's September decision "brought the necessary predictability of monetary policy, by explicitly mentioning that the current level of interest rates is compatible with the convergence of inflation in the medium term towards the objective" of 2%.

Meanwhile, Constantinos Herodotou, the Governor of the Cyprus Central Bank, affirmed the effectiveness of ECB monetary policy in managing price levels. "The recent data on inflation affirms that monetary policy transmission is effective and having an impact on inflation," Herodotou, who is also a member of the ECB Governing Council, told a conference.

"The ECB has managed to keep inflation expectations anchored, as most measures of longer-term inflation expectations currently stand at around 2%, which is the inflation target rate," Herodotou said.

However, the official added that "material uncertainty" continued to persist, referring to a recent spike in energy prices which could affect the rest of the economy, and have a new upward pressure on prices.

"Furthermore, the elevated wages and profit margins observed in the euro area last year need to be monitored closely, even though they are currently expected to normalize," Herodotou said.

ECB vice-president Luis de Guindos, known for his more dovish views, told the Financial Times on Monday that discussions of rate cuts were premature and cautioned against the challenges posed by navigating the "last mile of disinflation."

“We are on our way towards 2 per cent,” said de Guindos. “That’s clear. But we must monitor that very closely, as the last mile will not be easy... the elements that might torpedo the disinflation process are powerful,” he said.

According to the FT, most economists think the eurozone economy is likely to shrink in Q3 2023, contributing to an easing of price pressures and making the ECB unlikely to raise rates further.

De Guindos’ remarks, however, show that the central bank is intent on keeping interest rates “higher for longer.”

In the United States, weekly jobless claims rose slightly last week, along with the smallest increase in private employment in two and a half years in September. Both readings scaled back the U.S. dollar index to 106.5, while longer-dated U.S. Treasury yields eased from 16-year highs.

"The fact that the negative (U.S.) data made more of an impression on market participants may be due to...the fact that euro/dollar levels below $1.05 and 10-year T-note yields above 4.80% simply were quite ambitious levels, which required a considerable amount of data to support them," commented Ulrich Leuchtmann, head of FX and commodity research at Commerzbank.

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EURUSD forecasts: Analysts skeptical on euro rebound as dollar is an “expensive sell”

In his G10 FX Daily overview on October 5, Scotiabank’s Chief Currency Strategist Shaun Osborne suggested the charts were indicating relative potential for the euro:

In their euro to dollar forecast, analysts at Dutch bank ING said the euro was unlikely to see robust demand above the 1.053 area, as the dollar was an “expensive sell” due to U.S. exceptionalism:

The take on the EURUSD market from Societe Generale saw more volatility and forecast the euro to dollar low “not much below parity”:

In a longer-term EURUSD forecast, economists at Nordea said further downside for the pair was limited. The bank’s EUR/USD forecast for 2024 saw the pair trading at $1.10, while the EUR/USD forecast for 2025 had the pair higher still at $1.15:

EUR/USD traded at $1.0527 at the time of writing, up 0.21% on the day, as per MarketWatch data.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.