EUR/USD Exchange Rate Forecasts Clipped at Intesa Sanpaolo

Euro forecasts have been altered by analysts at Intesa Sanpaolo - just how far will the euro now fall in their opinion?

The US Employment Report published on Friday was very strong, and beat expectations, with both employment numbers and wages growing more than forecast, and the unemployment rate on the decline.

The dollar appreciated sharply, propelled by the increased probability of the Fed hiking rates next month and confirming how important interest rate expectations are for global foreign exchange markets.

The euro bled and the exchange rate corrected significantly dropping from a high of EUR/USD 1.0894 to a low of 1.0707.

At the time of writing the exchange rate has recovers some lost ground and is at 1.077.

In response to developments analysts at Intesa Sanpaolo have adjusted their forecasts for the euro to dollar exchange rate.

The most significant point to note is that their one month projection for EURUSD has been lowered from 1.08, made in late October, to 1.04. The forecast is valid from the 9th of November.

"The increased probability of a Fed hike in a December prompts us to bring forward from 3m to 1m our projection for the trough of the exchange rate at EUR/USD 1.04," says Asmara Jamaleh at Intesa Sanpaolo.

The Italian bank now expects the low-point to be hit on a one-month horizon because this is the period in which the divergence between the Fed and the

ECB should be strongest, with a possible Fed hike as opposed to the addition of further monetary accommodation by the ECB.

Downside risks prevail, towards parity, especially in the event of the ECB injecting more stimulus than expected by the market, which at present seems to be leaning towards a joint intervention on the purchase programme and on rates (possible deposit rate cut).

"Our 3m forecast is now EUR/USD 1.05, to indicate a downside stabilisation phase of the exchange rate following the Fed’s first hike. We have lowered our 6m projection somewhat, to EUR/USD 1.08, as the succession of Fed hikes, albeit very gradual, will keep exerting downside pressures on the euro," says Jamaleh.

On the other hand, Intesa Sanpaolo’s longer-term forecasts are EUR/USD 1.13-1.20 on a 12m-24m horizon, as downside factors should be concentrated in the initial phase of the Fed’s reversal, subsequently giving way to a gradual recovery of the single currency.

A higher euro exchange rate complex will be supported in part by the expected improvement of the economic picture in the euro area, which will in turn have the weaker euro to thank.