Euro-Dollar Forecasts Downgraded by Commerzbank

Commerzbank HQ dominates the Frakfurt skyline. Image © Andre Douque, reproduced under CC licensing conditions

Commerzbank downgrade their euro-dollar forecast profile by 200 pips.

Is the euro's resilience over recent days justified? asks Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank.

The pair has risen from near 1.14 to 1.1540 over the past ten days, and Nguyen says, "I am sceptical about the sustainability of this movement."

Breaking recent price movements down, Nguyen says what's interesting is that the price of Brent crude has barely changed over the period the euro has recovered:

"In other words, we're trading again at around USD 100 per barrel, where it was already last Monday. A look at our currency indices shows that the upward movement in EUR-USD is primarily attributable to a stronger euro. The dollar, by contrast, has moved more or less sideways."

The analyst says her assessment of subsequent interest rate developments suggests that, at best, EUR/USD should have stabilised its early-March falls, and not drifted higher.

"Added to this is the fact that the eurozone economy is far more exposed to the current energy price shock than is the case for the US. Yesterday's purchasing managers' indices demonstrated this once again. While the index for the eurozone fell quite sharply by 1.4 points, its U.S. counterpart fared much better with a decline of only 0.5 points," she explains.

EUR/USD at daily intervals.

Analysts say the euro has been aided by a material uplift in expectations for interest rate hikes at the European Central Bank in the coming months, with the market priced for at least two rises.

However, Commerzbank's FX analysts judge that to be "very optimistic."

The forex rulebook says rising interest rate expectations relative to elsewhere should lift the euro. And, if those expectations fall, the currency would come under pressure.

"Should there be more signs of a weakening economy, doubts in the market are likely to grow," says Nguyen, adding, "I am sceptical" about the sustainability of the euro-dollar's recovery.

Commerzbank does not expect the war to end until the end of May, and has revised its EUR-USD forecast for the end of June downward by two cents to 1.16.

The bank says the reason it is not even lower is primarily due to the end of the war, which is likely to trigger a recovery. Although the war is likely to leave its mark on growth, the relief over its end should lift EUR-USD back to the level seen before the outbreak of the war (1.18).