USD Pullback "Only Temporary", Euro-Dollar Forecast Below 1.05 By Julius Bear

The Dollar's April-May bout of weakness is a temporary phenomenon and the Euro to Dollar exchange rate can be expected to edge lower.

This is according to research from Swiss bank Julius Baer that finds the recent pullback in the Dollar is a result of rising market confidence that policy rates at the Federal Reserve will be cut this year and that the debate about potential rate hikes had gone too far.

"Nevertheless, we believe that this will remain only a temporary setback. The US dollar retains an interest rate advantage that will be amplified going forward once peers like the European Central Bank start to cut policy rates in the coming months," says David Alexander Meier, an analyst at Julius Baer.

He adds that the U.S. Fed is still debating its first policy rate cut, which we do not expect until September at the earliest.

"Furthermore, the U.S. should continue to show a cyclical superiority vs peer economies such as the eurozone. Even as U.S. growth is slowing, the eurozone will recover only slowly from its current growth slump," he explains.

This all amounts to tailwinds for the U.S. dollar, which should continue to strengthen.

Julius Baer maintains a bullish three-month forecast of EUR/USD at 1.04.

In the longer term, i.e. in an environment of Fed rate cuts that enable risk appetite to remain robust, Meier expects the EUR/USD to move back to current levels, forecasting 1.08 for 12 months.