Euro-Dollar Breakout Coming: SEB
- Written by: Gary Howes
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Analysts at SEB, the Scandinavian lender and investment bank, say we are approaching the time for a EUR/USD breakout to lower levels.
Announcing downgrades to their Euro-Dollar forecasts, analysts say, "it increasingly looks like conditions are aligning in favour of higher U.S. rates vs. Europe."
"We believe that a break of the recent range should support the USD during the spring. Furthermore, our new Fed and US growth forecasts provide less support for higher EUR/USD in H2 and we consequently lower our forecasts for the rest of 2024," says SEB.
The Euro has recovered back above 1.09 in the February-March period as investors grow more confident the Federal Reserve will cut rates in June. But these expectations took a knock following this week's above-consensus CPI and PPI inflation readings from the U.S. that show the disinflation trend is reversing.
The Dollar has strengthened, and U.S. bond yields (rates) have risen, suggesting that investor confidence in a June rate cut is receding.
"Conditions are aligning in favour of higher U.S. rates versus Europe. We believe that a break of the recent range should support the USD during the spring. We lower our EUR/USD forecasts for H2 as our new Fed and U.S. growth forecast provide less support for an increase in EUR/USD and the US election increasingly looks like a EUR risk," says SEB.
The bank now forecasts the Euro-Dollar rate at 1.07 in one month. Analysts now expect the EUR/USD at 1.08 for Q2, 1.08 for Q3 and 1.10 for Q4 vs. previous forecasts of 1.11, 1.13 and 1.14, respectively.
"The main argument for a move higher in Q2 is a rate cut cycle to be started by the Fed in June fueling risk appetite in the markets. We had expected the drivers for the EUR/USD to continue higher in H2 to be sharper cuts by the Fed compared to the ECB and a slowdown in US growth which would lessen the downside pressure on EUR/USD from US growth outperformance," explains SEB.
However, with fewer cuts now expected for the Fed and an upgrade of expectations on U.S. growth, analysts say both these arguments have weakened.
It is also noted that there is "a clear risk" for a stronger USD ahead of the U.S. election.
