Euro forecast: EURUSD may test 1.05 due to dollar strength

“The weakening growth outlook for China has been one factor that has weighed on the Euro over the summer alongside weak growth in Europe and the paring back of ECB rate hike expectations.

The release of the latest CPI reports at the end of last week revealed that headline and core inflation both fell sharply to 4.3% and 4.5% respectively in September. The weaker inflation data will reinforce expectations for no further hikes from the ECB and cast doubt on whether the September hike was necessary with the Eurozone economy currently so weak as well. It leaves the Euro vulnerable to further weakness in the near-term.”

“Permanent EUR undervaluation means that we Europeans are getting poorer on a permanent basis. Sometimes that can become quite obvious, for example when American employees working remotely and pensioners buy up the property market in Spanish holiday resorts. However, even disregarding such obvious effects EUR undervaluation means: we give away our export goods at cheap prices and pay over the odds for our imports.

I am not sure whether this factor was sufficiently considered in the cost-benefit analysis of those who were responsible for QE and regulation.”

“Until the year-end, we now expect the U.S. dollar to trade sideways against most currencies.

We now forecast EUR/USD, USD/CHF, and GBP/USD to trade at 1.06 (previously 1.12), 0.92 (0.87), and 1.20 (1.29), respectively, by end-December. And in Asia-Pacific, we see USD/JPY and AUD/USD trading at 145 (previously 142) and 0.65 (0.66), respectively, by end-December.

But looking further ahead, relative growth dynamics are likely to run against the U.S. dollar in 1H24. The US economy has yet to bottom, while Europe and China already have.

We expect U.S. dollar strength to peak next year and the greenback to give up some gains. We reflect this in EUR/USD, USD/CHF, and GBP/USD with our September 2024 forecasts at 1.12 (previously 1.16), 0.87 (0.84), and 1.30 (1.36), respectively. This view requires Europe to stay out of recession and China to stabilize.”

“Last week's late bounce in EUR/USD looks to have petered out above 1.06 and further points to quarter-end flows briefly weighing on the dollar. The aforementioned revisions to US consumption and savings data make the case for EUR/USD to stay lower for a little longer, meaning that the 1.0490/1.0500 area could easily be retested this week.

Expect the calendar to confirm another set of soft PMIs for Europe in September and focus to switch to whether the European Central Bank (ECB) needs to deliver one final rate hike after all. There are plenty of ECB speakers this week, and the highlight will probably be President Christine Lagarde speaking at a monetary policy conference on Wednesday. For reference, money markets have virtually priced out any further ECB tightening in this cycle – just 3-4bp of tightening priced around the turn of the year.

Elsewhere, we mentioned last week that Italian fiscal concerns could start to have an impact on the euro. Let's see whether the weekend announcement by the Italian government that it plans to sell EUR21 billion of assets 2024-26 has any impact on the pressured government bond market.

“Developing EUR gains through the latter part of last week stalled Friday and the soft close on the week effectively drew a line under the minor EUR recovery.

The trend remains the market’s friend for now and weak trend momentum – while signaling the EUR is potentially oversold here – remains a dead weight on the EUR’s attempts to recover.

Support is 1.0490/1.0500. Resistance is 1.0600/1.0610.”