Euro / Dollar Forecasts Lowered at Danske Bank

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Analysts at Danske Bank - the Danish-based international financial services provider - have cut their forecasts for the Euro to Dollar exchange rate (EUR/USD).

The bank continue to favour a stronger U.S. Dollar as analysts see policy makers as having become increasingly committed to curtail global inflation by tightening financial conditions.

"Further, the economic cycle is slowing," says Kristoffer Kjær Lomholt, Chief Analyst at Danske Bank, "we see the surprise potential for the European economy as small."

The call comes amidst a benign start to the year for the Dollar which outperformed in the second half of 2022.

The market and analyst community were in consensus in holding expectations for further gains, but declines in January has seen extended positioning retreat and some analysts rowing back on formerly bullish stances.

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But Danske Bank maintain expectations for Euro-Dollar downside and have in fact lowered their 12-month ahead forecast for the exchange rate.

They see central bank policy makers as having become increasingly committed to curtailing global inflation by tightening financial conditions.

January's Federal Reserve policy meeting should give a favour of this shift as economists expect an unambiguous message that quantitive easing will end and interest rates will rise at the March meeting.

They will further guide that discussions are underway as to how and when to conduct quantitative tightening, the process whereby they reverse the quantitative easing programme and shrink the balance sheet.

The Dollar's reaction will likely depend on how much of the information coming out of the Fed has already been incorporated into Dollar valuations.

"Fundamentally, the US should continue to be a high(er) interest rate market and equities continue to appeal to foreign investors," says Lomholt.

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The Fed will contribute to the tightening of global financial conditions in 2022 which is a key input into the majority of Danske Bank's exchange rate forecasts for the year ahead.

"The US and euro area economies are running at growth rates well above the trend as both regions remain in a mode of recovery, but the pace of expansion is slowing across regions, led by China," says Lomholt.

Danske Bank's modelling shows 'fair value' for EUR/USD to reside in a wide 1.00-1.20 range.

But analysts find a trip into the lower part of this bracket is more likely ahead of any recovery.

"The increasingly hawkish stance from the Fed continues to support our expectation of a stronger dollar with EUR/USD moving to 1.08 in a year from today," says Lomholt.

Danske Bank lower their current 12-month forecast on EUR/USD from 1.10 to 1.08.