FX Comment: EUR/USD downtrend resumes

by: Georgette Boele

  • We expect EUR/USD to fall further
  • Our EUR/USD forecast for the end of June and December are 1.0 and 0.95 respectively

After the FOMC meeting on 18 March, in which the Fed signalled slower rate hikes, the US dollar fell under heavy pressure and EUR/USD tried several times to move above 1.10. This was also driven by an improvement in sentiment in the euro, because of stronger-than-expected eurozone economic data releases. Since the start of this week, sentiment in the US dollar has improved again. There are several reasons for this.

For starters, financial markets have realised that the long-term trend of US dollar strength and euro weakness has not changed and that the bounce higher in EUR/USD will likely be temporary. The failure of EUR/USD to stay above 1.10 strongly reflects this negative sentiment in EUR/USD.

In addition, investors hold a more positive stance on the US dollar ahead of crucial US economic data releases such as Chicago PMI (later today), ISM (tomorrow) and US employment report on Friday. The latter will be released in thin market conditions, because of public holidays in most of Europe. So large price swings after the release of this report are very likely.

Looking ahead, we remain of the view that EUR/USD will move lower. The aggressive QE programme by the ECB will continue to push down eurozone yields and the euro despite improving macro data. In addition, strong US economic data will warrant a 25bp rate hike at the September Fed meeting. Furthermore, financial markets will adjust to factor in more Fed rate increases this year and next year. This is a major positive driver for the US dollar. Our EUR/USD forecast for the end of June and December are 1.0 and 0.95 respectively.