Euro-Dollar Recovery Ahead: UniCredit

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The Euro is tipped to recover in a decisive fashion against the Dollar as the U.S. Federal Reserve still looks on course to 'outcut' the European Central Bank (ECB) in 2024.

This is according to a new analysis from UniCredit, the Milan-based international lender and investment bank.

"We expect a U.S. recession in 2024, with the Fed cutting rates earlier and by more than the ECB, which still suggests EUR-USD will be back above 1.10 next year," says Roberto Mialich, FX Strategist for UniCredit Bank in Milan.

The call comes at a time of intense Dollar strength that has pushed the Euro to Dollar exchange rate (EURUSD) back below the 1.05 level from its 2023 highs near 1.12, giving these UniCredit forecasts a counter-trend tone.

But Mialich's reasoning for expecting the tables to turn once again is clear: the Federal Reserve will be in a position to cut interest rates within months, and there is ample scope for such a move given it has jacked rates higher than its major peers.

But near-term strength in the Dollar can continue with this week's looming U.S. jobs report - one of two U.S. data highlights of the month - unlikely to shift the dial on a stellar performance by the U.S. currency which has now risen 7.5% since its July lows (according to the DXY index).

Dollar strength has rising U.S. long-term bond yields to thank, as well as the 'risk off' sentiment in global markets that the move has prompted while the Euro has struggled amidst a series of downside surprises in recent Eurozone data.

UniCredit takes note of recent price action to lower near-term Euro-Dollar forecast targets to 1.09 for the final quarter of 2023 - down from 1.12 - and 1.15 for the end of 2024.

Nevertheless, the profile remains one of gradual upside by the Euro against the Dollar owing to UniCredit's expectations for an economic recession in the U.S. in 2024.

"We think the Fed has already peaked on rates and will start an easing cycle earlier and go deeper than other major central banks in 2024. This picture still suggests the USD will weaken next year, but likely more gradually than our earlier forecast, given the strength the greenback has shown up to now," says Mialich.

Above: "OUR FED AND ECB POLICY RATE OUTLOOKS CALL FOR HIGHER EUR-USD IN 2024" - UniCredit.

"Forward rates continue to imply a final Fed rate hike by December and moderate easing in 2024. Yet, as noted, we think the Fed will remain on hold at 5.50% and start cutting rates from 1Q24, to reach 4.00% by 4Q24," says Mialich, hinting at the prospect for a rerating lower in U.S. rate expectations before the year is done.

Meanwhile, UniCredit do not expect the ECB to start easing until 2Q24, bringing the deposit rate to
3.25% by the end of the next year.

"The difference between the two policy rates will thus halve (see Chart 1), lifting EUR-USD to 1.15 by 4Q24 (vs. our previous forecast of 1.16)," says Mialich.