The EUR/USD exchange rate concluded the previous week significantly below 1.08, a result attributed to unexpected data emerging from the US labor market (NFP). Given the favorable job market conditions, the Federal Reserve (Fed) is well within its rights to defer interest rate hikes.
Despite analysts at Nordea maintaining their projections of a weaker dollar, marked by the considerable enthusiasm on Wall Street and the anticipation of future interest rate cuts, economists suggest the EUR/USD exchange rate could rebound to approximately 1.10 in May and ultimately settle around 1.14 by the end of the current year.
Irrespective of the events of the past week, which witnessed the retention of existing interest rates and a reassessment of forecasts for rate cuts in 2024, Nordea Bank stands firm in upholding its forecast.
This forecast envisions the Fed implementing interest rate cuts totaling 100 basis points (four cuts of 25 basis points each) later in the year. The timing of these cuts—whether in March or May—is considered of minimal significance to analysts.
The significance of market sentiment becomes apparent, with recent days presenting a distinctly ambiguous scenario. On one hand, the phenomenal January labor market reading and hawkish comments from the Fed provided an impetus for a surge in the value of the dollar.
Conversely, the stock market is dominated by buyers, potentially paving the way for a scenario characterized by satisfactory economic growth and an eventual preparation by the central bank for interest rate cuts.
A more positive sentiment serves as a long-term catalyst for a weaker dollar, a development crucial for American exporters. According to experts, the USD exchange rate tends to strengthen both in periods of robust economic strength and pronounced weakness, such as during recessions or heightened risk aversion.
Furthermore, this theory posits that the USD performs poorly when global economic prospects outshine those of the US economy. This theoretical framework effectively encapsulates the experiences of the past two years, as highlighted in latest analysis.
Looking ahead, experts anticipate that lower interest rates globally will bolster economic activity and enhance risk-related sentiments, thereby diminishing the appeal of the US dollar as a safe haven.
While anticipating continued strong performance of the US economy on a global scale, they foresee a gradual reduction in its global advantage, leading to an increase in the value of EUR/USD.
In line with projections, a plausible scenario for the forthcoming weeks involves a rebound from the tested upward trend line observed on Friday, with a subsequent move towards the 1.10 mark. This trajectory could potentially culminate in a value of around 1.14 by December 2024.
03.02.2024
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