Euro Forecast Back Below 1.10 dollars

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The Euro to Dollar exchange rate will yield to the U.S. 'soft landing' says Deutsche Bank.

The implication is a return below the 1.10 level in the Euro to Dollar exchange rate, according to a new research note from Deutsche Bank's currency strategy team.

"The US has succeeded in securing a goldilocks soft landing – this is the dominant theme of our FX Blueprint. There are numerous trading implications that follow on from this," explains George Saravelos, a strategist and Head of FX Research at Deutsche Bank.

A 'goldilocks soft landing' is a scenario where the Federal Reserve succeeds in bringing inflation down via higher interest rates but without squeezing the life out of the economy and triggering recession. Saravelos thinks the Fed will likely keep cutting interest rates, but not by as much as priced and the dollar’s high-yielding status will remain.

The Dollar has been on a downward trajectory of late as markets 'price in' the start of an interest rate cutting cycle, that kicked off in September by a sizeable 50 basis point interest rate cut.

But, "the USD is therefore not about to enter a new bear market and we like fading the recent dollar sell-off via EUR/USD,' says Saravelos.

And then there is Germany.

"In Europe, the German economy is undergoing a negative competitiveness shock and the EUR is historically unable to rally when the German economy is so weak," says Saravelos.

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The German economy looks to be in recession, acccording to survey data for September, and analysts we follow say this will pressure the ECB to cut interest rates again before long. Included in this group is Deutsche Bank's economics research team, which thinks the ECB could cut by 50 basis points before year-end.

The team also thinks the ECB can step up the pace of cuts in 2025 from quarterly to sequentially.

Near-term, the U.S. election will become more of an issue for currency markets.

"The US election looms as the large event risk on the horizon. This has plenty of potential to dislodge the market from its current regime, and the outcome will play a key role in adjusting our views as 2025 comes in to view," says Saravelos.