Euro-Dollar Forecast: Back to 1.06 Says France's BNP Paribas

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One of Europe's biggest investment banks says France's election outcome will weigh on the single currency as it forecasts the Euro to Dollar exchange rate to trend lower over the coming months.

BNP Paribas, which is headquartered in France, says it is "remaining bearish" on the Euro, "even prior to the French parliamentary election being called we held a bearish view on the EUR."

The details are set out in the bank's mid-year outlook that follows the outcome of France's legislative elections that granted no single party or political bloc a majority.

In fact, BNP Paribas, which is one of France's biggest lenders and investment banks, thinks the outcome of the French parliamentary election, "reinforces the case for EURUSD to decline towards our year-end target of 1.06."

The consensus of over 30 of the world's biggest investment banks is that the exchange rate is to steadily head higher, meaning BNP Paribas falls out of this consensus with a call for levels lower than the current level in spot.

We note, however, that one investment bank sees the rate falling to parity in the forecast horizon (these forecasts are available as a free download here).

Foreign exchange markets have largely brushed off France's election result, sending Euro-Dollar higher in sympathy with a broader selloff in the U.S. Dollar.

But BNP Paribas says France’s fiscal trajectory will be of concern, with cuts to public spending required if the country is to comply with EU fiscal rules.

"Even without the far left or far right looking likely to form even a minority government it still seems unlikely to us that the savings required would be made. Higher borrowing costs and uncertainty around policy making under a divided government could weigh on growth in France," says Ishan Gurnani, FX Strategist, at BNP Paribas.

Analysts think the ECB will cut on two more occasions in 2024 and that the support from the Eurozone's current account surplus will start to fade as the surplus is recycled abroad in the hunt for higher returns.

"The eurozone’s value driven equity indices may make it less competitive in an AI boom," says Gurnani.

Regarding the Dollar, analysts think weakness will be short-lived as a the upcoming election will offer tailwinds.

"The USD remains well supported, which we expect to continue as the US presidential election in November gets closer," says Gurnani. "A Republican “red wave” would be the most bullish result for FX VIEW the USD as protectionist trade policy could add inflationary pressures, especially when combined with more public spending."

Euro-Dollar is forecast to return to 1.06 in 2024 ahead of a steady recovery to 1.10 in 2025.