EUR/USD forecast: Euro slides after ECB raises interest rates

Euro slides after ECB raises interest rates

The euro to dollar rate (EUR/USD) has slid below $1.068, marking its lowest point in three months, as the European Central Bank (ECB) hiked interest rates for the tenth consecutive time, raising them to the highest level since 1999, and signaled a temporary pause in its monetary tightening efforts.

The euro witnessed a 0.3% decline following the announcement by ECB policymakers to raise interest rates by a quarter-point, reaching 4 percent, as was anticipated by many investors. The move failed to boost the currency, as it was trumped by expectations of the hike being the ECB’s final tightening.

This policy move comes at a time of heightened investor apprehension regarding an impending economic downturn, which has been reaffirmed following the European Commission's recent downgrade of growth forecasts for the 27-country union to 0.8% for this year and 1.4% for 2024.

ECB policymakers conveyed that current borrowing costs have reached a level where, if maintained over an adequate timeframe, they would make a significant contribution to bringing inflation back to its target level. Nonetheless, inflation is expected to remain elevated for an extended period, despite its current downward trajectory.

The ECB has now increased borrowing costs for ten consecutive policy meetings since July 2022, aiming to combat rampant inflation.

In recent days, both investors and policymakers have expressed growing concerns about persistent price pressures, especially with oil prices surging to 10-month highs following supply cuts by leading producers Saudi Arabia and Russia.

According to the ECB's economic forecasts, the Euro Area anticipates an average inflation rate of 5.6% in 2023 (compared to 5.4% in the June projection), 3.2% in 2024 (versus 3.0%), and 2.1% in 2025 (compared to 2.2%).

Stronger-than-expected inflation data from the United States has also further solidified the case for prolonged elevated interest rates in the country, although markets are expecting the Federal Reserve to leave rates unchanged at the upcoming Federal Open Markets Committee meeting next week, while the probability of a hike at the November meeting currently stands at 35%, as per CME’s FedWatch tool.

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EUR/USD forecasts: Analysts point to euro vulnerability in coming weeks

In a comment cited by FXStreet, UOB Group’s Economist Lee Sue Ann and Markets Strategist Quek Ser Leang noted that a deeper drop could drag the euro to dollar rate to the 1.0515 zone in the upcoming weeks:

In their FX Snapshot released on September 4 — a EUR/USD projection that is yet to be updated — analysts at Citibank Hong Kong accurately foresaw the ECB’s decision to hike rates:

Citibank slightly lowered its EUR/USD forecast for the next three months to an average of $1.10 (previously $1.11) and adjusted its 6 to 12-month euro-to-dollar projection to $1.14 (previously $1.16). The bank’s long-term EUR/USD projection stands at $1.20.

Francesco Pesole, FX Strategist at Dutch bank ING, said the EUR/USD rate would become even more dependent on the dollar in the near future, with a potential retreat to $1.06 on the cards closer to the Fed meeting next week:

Analysts at Danske Bank continued to forecast a lower euro to dollar exchange rate following yesterday’s ECB meeting, seeing it potentially trade at $1.03 in 12 months’ time:

Markets will be watching ECB President Christine Lagarde’s speech at the Eurogroup meeting today, as well as Eurostat’s release of Q2 labor costs and trade balance figures.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 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.