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EUR/USD: Dollar strength and diverging central bank policies

eurusd analysis, forex trading

The dollar is experiencing renewed strength, leading several banks to predict that the EUR/USD exchange rate will fall below 1.05 in the coming months. Among these institutions are Goldman Sachs and MUFG Bank, and now Nordea has joined them. Nordea has no doubts that the European Central Bank’s (ECB) anticipated interest rate cut in June will cause the EUR/USD exchange rate to drop to 1.04 within three months. This prediction is significant as it aligns with the growing consensus among major financial institutions about the dollar's future trajectory.

The EUR/USD exchange rate has been rapidly declining, primarily due to the strengthening of the dollar. This dollar strength is being driven by hawkish comments from members of the U.S. Federal Reserve (Fed). Despite a decline in inflation, the Fed has made it clear that it is too early to start discussing potential interest rate cuts. This stance is causing concern among investors, who fear that the Fed might delay rate cuts until 2025. Such a delay would be a significant blow to the U.S. economy, but it would also further strengthen the dollar against other currencies, including the euro.

Recent changes in market expectations can be seen in the EUR/USD exchange rate, which has seen a significant rally from around 1.06 to 1.09. Investors had hoped that Fed Chairman Jerome Powell would signal a shift towards lowering interest rates after the summer. However, these hopes were dashed as the Fed remains focused on maintaining a restrictive monetary policy. This has led to a shift in market sentiment, with many now expecting the Fed to delay any rate cuts until well into the future.

The likelihood of a U.S. interest rate cut in September has decreased to below 50% after all Fed members unanimously agreed that more time is needed to evaluate the current economic situation. They also believe that monetary policy needs to remain tight. This shift in expectations has led to concerns that the markets may be running out of steam for a risk rally. The potential cuts in quantitative tightening (QT) by the Fed, which were anticipated to start in June, may have already been factored into current market prices. The market's reaction will now depend heavily on how today's message from NVIDIA is interpreted.

Analysts are anticipating that the minutes from the latest Federal Open Market Committee (FOMC) meeting will negatively impact overall market sentiment and reinforce the downward trend in the EUR/USD exchange rate. These minutes are expected to provide further clarity on the Fed’s stance and its future monetary policy, which could have significant implications for the currency markets.

Up until recently, the majority of investment banks were unanimously predicting a weaker dollar for the first half of 2024. However, the situation has changed, and it is now time for these institutions to clearly define their outlook for the EUR/USD exchange rate for the next six months. The changing dynamics in the global economy and shifting expectations about monetary policy are influencing these predictions.

Analysts from Goldman Sachs, MUFG Bank, and Nordea now forecast that the EUR/USD exchange rate will fall below 1.05 in the coming months. Nordea, in particular, has specified that they expect this decline to occur within a three-month period, with the rate potentially reaching as low as 1.04 before rebounding sharply. This forecast highlights the growing consensus among financial institutions about the direction of the euro-dollar exchange rate.

Nordea expects the EUR/USD exchange rate to drop to 1.04 within three months, followed by a modest recovery that could see the rate rise to 1.10 by the end of 2025. They believe that the U.S. economy continues to show resilience to high interest rates, giving the Fed a level of comfort that the European Central Bank and the Bank of England do not have. This resilience is a key factor in Nordea’s forecast and highlights the different economic conditions facing the U.S. and Europe.

Given the current inflation data, Nordea believes that the Fed will need to exercise patience and wait for several months of positive economic data before making any moves on interest rates. This cautious approach is seen as necessary to ensure that any decisions made are based on solid economic foundations. In this context, Nordea argues that a rate cut in September is too soon, suggesting that such a move would likely have to wait until December, after the presidential elections.

Nordea also believes that the EUR/USD exchange rate is likely to decline over the summer as it becomes clear that the ECB and the Fed are on different paths regarding interest rate cuts. The divergence in their monetary policies is expected to create further pressure on the euro, leading to a decrease in the EUR/USD exchange rate. This forecast underscores the importance of understanding the different economic conditions and policy responses in the U.S. and Europe.

eurusd analysis, forex trading
EUR/USD daily chart, MetaTrader, 22.05.2024



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