Euro-Dollar Rate Decline Can Go Below 1.05 says MUFG

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The Euro's ongoing decline against the Dollar has further to run say foreign exchange analysts at a leading international investment bank.

Currency strategists at MUFG say in a regular weekly briefing they anticipate the Dollar's comeback to be unfazed by near-term event risks, namely the release of FOMC minutes and PCE deflator data this week.

Indeed, we are witnessing the rebirth of 2023's U.S. Dollar dominance, say analysts.

"The repricing of a higher terminal rate and scaling back of rate cut expectations later this year has breathed fresh life into last year's strong USD trade," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.

Underscoring the Dollar's rebound is the lifting of expectations amongst investors for the peak in the Federal Reserve's interest rate hiking cycle.

In January a final hike was expected in March, but a further two hikes have now been added to the tally.

The odds of a rate cut later in 2023 have meanwhile receded, offering support for the Dollar following a soft end to 2022 and start to 2023.

"We are recommending a new short EUR/USD trade idea to reflect our view that there is room for the USD rebound to extend further," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.

EUR/USD raced to 1.10 in January but by early February incoming data from the U.S. was confounding expectations and the rally fizzled out.

Labour market dynamics, wage data, retail sales and inflation figures all point to an economy that remains robust enough to churn out above-target inflation levels, prompting the EUR/USD to retrace gains.

"Stronger US activity data combined with firmer inflation at the start of this year is encouraging market participants to price in a more hawkish outlook for Fed policy," says Halpenny.

Above: EUR/USD can decline to the 200-day MA (blue line) says MUFG.

MUFG sees the USD as remaining the key driver of the Euro to Dollar exchange rate and targets a fall to 1.0350.

"We are expecting the pair to fall back towards support from the 200-day moving average that comes in at around 1.0330," says Halpenny.

Regarding the Euro's side of the equation, MUFG says the recent good news regarding the region's economic prospects are well understood.

"The price action also highlights that the euro-zone rate market and EUR have already moved along way at the start of this year to better reflect the improving cyclical outlook," says Halpenny.