Euro-Dollar to Fall Again: DNB

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"We see recent softness in U.S. data as temporary"

Nordic bank DNB Markets has raised its short-term forecast for the euro, citing shifting investor sentiment and increased optimism over European economic prospects.

The upgraded forecast target is nevertheless below the current level in spot, reflecting an ongoing 'bullish' stance towards the U.S. Dollar.

The upgrade is necessary to reflect the sharp rally in the euro, which has seen its largest climb since 2009. This rally is driven by renewed confidence in European growth and fading U.S. economic exceptionalism.

"The news last week of a German fiscal ‘whatever-it-takes’ approach on infrastructure and defense has flipped sentiment from pessimism to optimism,” DNB Markets strategists said in a note on Thursday.

Despite this, the bank remains bullish on the U.S. dollar in the long term, maintaining its 12-month EUR/USD forecast at 1.06 and warning that recent U.S. economic concerns may be overstated.

The bank now expects the EUR/USD exchange rate to reach 1.04 in three months, up from a previous forecast of 1.00.

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DNB Markets dismissed recent U.S. growth concerns as exaggerated and continues to expect a Federal Reserve rate hike in December, in contrast to market expectations for rate cuts.

"We see recent softness in U.S. data as temporary and expect inflation to rise later this year, prompting the Fed to tighten rather than ease,” the bank said.

While acknowledging global uncertainty, the bank said it expects the dollar to regain strength as markets adjust to improving U.S. fundamentals.

However, DNB also highlighted a potential long-term shift in global capital flows as investors reassess risks linked to U.S. trade policies and international relations.

"If we are on the brink of a structural shift in global savings, we are opening up for a significant repricing of the USD that goes beyond what we have already seen," the note warned.

Despite this uncertainty, the bank maintains that U.S. fundamentals remain solid and sees near-term market pricing as overreacting to geopolitical risks.

DNB also adjusted its outlook for Scandinavian currencies, expecting higher U.S. interest rates and a stronger dollar to pressure the Swedish krona (SEK) and Norwegian krone (NOK).

The EUR/SEK forecast was lowered to 11.30 (previously 11.50) in three months and 11.50 (previously 11.70) in 12 months, reflecting the krona's recent outperformance. Meanwhile, USD/NOK and USD/SEK are forecast at 11.25 and 10.77 in three months, and 11.32 and 10.85 in 12 months, respectively.

"The SEK has been the best-performing major currency in recent weeks, benefiting from a shift in Swedish macro data and stronger European manufacturing activity," the note said.