Euro-to-Dollar Forecasts Downgraded as Market Eyes German GDP Data 

- EUR hits May 2017 low but analysts say it could fall further.

- EUR forecast downgrades come thick and fast on Thursday. 

- Forecasts warn of lower EUR ahead as German GDP looms.

- German data could weigh further on EUR growth forecasts.

- China's coronavirus hit not yet factored into the consensus.

- And the consensus outlook matters for EUR/USD prospects.

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The Euro-to-Dollar rate outlook was dealt another blow Thursday by a wave of forecast downgrades amid fresh fears for the global economy and as markets turn their attention to German growth data due out early on Friday morning. 

Europe's single currency has been beset my a multitude of headwinds that culminated in it falling to its lowest level since May 2017 this week, after breaking below a key technical support on the charts earlier in February. 

But it's the apparently bleak prospects for the Eurozone economy that's prompting firms to cut their forecasts. 

Forecast downgrades don't preclude the Euro-to-Dollar rate from occasional, intermittent rallies up ahead but at least some of the changes do warn of what could be new multi-year lows for the exchange rate in the coming weeks. 

Above: Euro-to-Dollar rate at 4-hour intervals.

"EUR/USD is expected to remain sluggish as investors assess how the European industrial machine is going to creep into gear after stalling last year. 1.07/1.08 is possible here and bullish scenarios are having to be postponed," says Chris Turner, head of FX strategy at ING. 

ING began the year with a conservative and below-consensus outlook for the Euro so has downgraded only its six-month forecast of 1.12, which has moved to 1.11, while leaving its 12-month projection of 1.13 unchanged. But the bank has warned of a possible trip down to 1.07 in the coming weeks, which would put the single currency at its lowest ebb since April 2017. 

"The euro area remains a region of low growth, accompanied by weak inflation dynamics and our baseline is for a continued relative underperformance of European financial assets. In contrast, a host of tailwinds are supporting USD denominated assets and the dollar has been gaining ground," says Lars Merklin, a senior analyst at Danske Bank. "Models suggest EUR/USD fair value is around 1.20, but we see no trigger in favour of such a correction."

Danske entered 2020 looking for the Euro to reach 1.15 against the Dollar by year-end, which was by no means an outlandish forecast given the overall market consensus has been looking for the same level in December, although the bank cut that projection to just 1.07 on Thursday. It now forecasts a "downward sloping profile" that's expected to take the Euro-to-Dollar rate down from 1.08 to 1.07 by June and keep it there until year-end. 

Above: Euro-to-Dollar rate at daily intervals.

"We have downgraded our forecasts for EUR/USD to 1.10 for Q1 (previously 1.14), 1.12 for Q2 (previously 1.15) and 1.14 for Q3 (previously 1.16)," says Georgette Boele, a senior FX strategist at ABN Amro. "Fears about the impact of the coronavirus has supported safe-haven currencies...US data have mainly surprised on the upside and this has supported the US dollar across the board. Meanwhile, eurozone data have come in weaker again."

All of the above firms entered the 2020 year with conservative forecasts that were either below the market consensus or roughly in line with it, while a range of other institutions have been looking for levels far north of the 1.15 threshold that the broader market is eyeing for year-end.

In other words Thursday's downgrades could be just the tip of the iceberg, with more to come in the weeks ahead and some of the subsequent changes will undoubtedly be larger and possibly enough so for them to drag the the market 'consensus' of 1.15 lower along with them. 

Incoming data is painting a bleak picture of the Eurozone economy, leading some in the market to suggest the European Central Bank could be forced to cut its already-deeply-negative deposit rate even further below zero later this year.

"The immediate threat comes from the German Q4 GDP release tomorrow, but the problem runs deeper than that," says Kit Juckes, chief FX strategist at Societe Generale. "The consensus forecast currently looks for a 0.1% q/q gain, which delivers a 0.3% y/y gain, The SG forecast is for a 0.3% q/q fall and a flat y/y outcome. The first estimate of Eurozone Q4 GDP growth came in at 1% y/y but it doesn't take a rocket scientist to work out that a further German deceleration will drag the whole zone down with it." 

Above: Societe Generale graph showing diverging consensus expectations for U.S. and Eurozone GDP growth.

The Italian economy is flirting with a double-dip recession, the French economy contracted in the final quarter last year while GDP data is due out from Germany at 07:00 on Friday. And with Eurostat having preliminarily estimated quarterly growth of 0.1% for the Eurozone as a whole, the danger is that a possible German contraction saw the whole of the Eurozone stall heading into year-end. 

German GDP data is due out at 07:00 Friday although it covers last quarter and it's the growth outcomes for the months ahead that matter most for the Euro.

"EUR/USD has tracked the steady downgrading of Eurozone growth forecasts relative to the US during the last two years. The 2020 consensus has remained solid at 1.8% for the US and steady at 1% for the Eurozone, but if either of those moves in the next few years, it will be the Eurozone one," Juckes says. "In real terms, the euro is at levels seen in early 2017 and 2000-2001. That makes shorting EUR/USD hard, but it doesn't prevent us from thinking it can fall against the yen (now) and NOK. (later)." 

Most notably all of those figures relate to a period in which the Chinese economy was unencumbred by the coronavirus that's turned major cities of many millions of people into ghost towns since early January. That's likely to be bad news for the Eurozone which arguably suffered even more than the two protagonists in the U.S.-China trade war, if the official Chinese statistics are to be believed. And the growth outlook matters for the trajectory of the Euro.  

"Motor vehicles are the EA’s single biggest export to China (~17% of the total). We're not surprised to see those percentages rise when we look at Germany in isolation," says Davide Oneglia, an economist at TD Lombard. "Hubei, where the epidemic originated, is a large car industry hub. While factories regularly shut down for Chinese New Year, the protracted lockdown of the province has put the auto sector’s long supply chains under strain. Some of the largest global car manufacturers have issued warnings about their ability to continue production in Europe if the situation persists until the end of the month."

Above: Societe Generale graph showing EUR/USD relationship with relative U.S. and Eurozone growth consensus.