Natixis Lowers Euro-Dollar Forecast

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French bank Natixis has cut its forecast for the Euro to Dollar exchange rate and warns that risks will be pointed to the downside if Donald Trump wins in November.

Although markets are fully priced for a July rate cut at the Federal Reserve, Natixis reckons the first cut will come in June.

But crucially, economists at the bank now expect the Federal Reserve to cut rates by 100bps in 2024, rather than 150bps previously anticipated.

This means an expected decline in the value of the U.S. Dollar will be less steep than previously anticipated. "This will weaken the dollar, but less than initially expected, especially in the second half of the year," says Nordine Naam, Forex Strategist at Natixis.

The Dollar is 2024's top-performing G10 currency thanks to retreating Fed Funds rate cut expectations in response to slower U.S. disinflation since the start of the year and stronger-than-expected U.S. economic activity.

Naam warns the risk factor to an expected decline in the Dollar lies in the U.S. presidential elections in November, "with the dollar strengthening in the event of a Trump victory".

The Euro has meanwhile been "penalised" by a more dovish European Central Bank, according to Natixis.

"It is more confident that disinflation will continue against a backdrop of particularly sluggish European growth, justifying a 1st rate cut in June. The market thus reflects almost 100bp ECB rate cut expectations in 2024 (vs 125bp in our view), with a 1st move in June," says Naam.

If Natixis is correct, then the market will price in more by way of rate cuts, potentially limiting the Euro's upside potential.

"In the coming months, the EUR/USD is set to recover more slowly than expected, with a forecast of 1.11 at year-end versus the 1.13 initially forecast," says the analyst.