Sun, June 16, 2024

EUR/USD Forecasts Diverge Amid US Data Impact

EUR/USD - Euro and the united states dollar

Quick Look:

  • MUFG predicts EUR/USD at 1.12 by March 2025; Barclays sees 1.05–1.06 this year.
  • ECB cut rates by 25 basis points; EUR/USD fell from 1.09 to 1.08 after strong US job data.
  • May non-farm payrolls rose by 272,000, unemployment was 4.0%, and average earnings were up 0.4%.

Financial analysts’ opinions differ regarding the future trajectory of the EUR/USD exchange rate. MUFG forecasts a strengthening of the EUR/USD exchange rate to 1.12 by March 2025, suggesting a favourable outlook for the euro. In contrast, Barclays predicts a retreat of the EUR/USD to the 1.05–1.06 range within the current year. Thereby indicating potential challenges ahead for the euro.

US Data Spurs EUR/USD Divergence

The European Central Bank (ECB) recently made a significant policy move by cutting all interest rates by 25 basis points. Specifically, the refinancing rate was reduced to 4.25% from the previous 4.50%. Initially, the EUR/USD exchange rate demonstrated resilience; however, it experienced sharp losses following the release of stronger-than-expected US employment data, leading to a decline from near 1.09 to 1.08.

In May, US non-farm payrolls increased by 272,000, surpassing consensus forecasts of around 180,000. The April figures were revised down from 175,000 to 165,000. Despite this, the unemployment rate rose to 4.0%, marking a two-year high. The employment decline exceeded 400,000 for the month, although average earnings saw a 0.4% increase, with a year-on-year rise of 4.1%.

ECB Cuts Rates by 25 Basis Points, Refinancing at 4.25%

Renewed inflation concerns have emerged, casting doubt over the likelihood of imminent Federal Reserve rate cuts. Market expectations for a September rate cut have dipped to near 50%, reflecting these inflationary pressures. Jane Foley from Rabobank highlights the limited scope for dollar losses, noting the potential for US inflation to pick up again by mid-year. She suggests that the Federal Reserve’s easing cycle could be brief, with the dollar likely to remain firm.

US Adds 272,000 Jobs in May, Unemployment Hits 4.0%

MUFG analysts express growing confidence that the opportunity for a decline in EUR/USD has passed, citing more favourable macroeconomic conditions and an improved external position for the eurozone. BNP analysts maintain that the USD will continue to hold a strong position unless there is a significant deterioration in the US labour market or a surprising upside in eurozone data.

Furthermore, CIBC suggests that USD dips should be considered buying opportunities in the next quarter, anticipating a medium-term dynamic shift in 2025. Barclays points to disappointing news and data flow from China as a factor in their expectation for further EUR/USD underperformance.

Inflation Concerns Lower Expectations for Fed Rate Cuts

ECB President Christine Lagarde has reiterated that inflation remains above target at 2.6%, necessitating a cautious policy approach. She has not indicated a specific path for future rate cuts but has emphasised that policy rates will remain restrictive. The ECB is likely to maintain its current stance until at least September. The focus has shifted to the US due to a quiet European economic calendar. The EUR/USD is holding below a rising trend line and the 50-day EMA in the 1.0820 region, suggesting potential downside.

Analysts Predict Mixed Outlook for EUR/USD

The European Parliament elections will involve nearly 400 million EU citizens. These elections may not have a major impact on the markets. However, they are significant as the first such elections following Brexit. 720 Members of the European Parliament (MEPs) will participate in the electoral process. Key issues in this election include defence and security, economic concerns, job security, poverty, public health, and climate change. Far-right parties seek to increase their influence, and the outcome will determine the future leadership of the European Commission. Initial results are expected on the evening of June 9.

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