Too Soon to Raise Euro-Dollar Forecasts Says Intesa Sanpaolo

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Despite the sharp appreciation of the euro following the European Central Bank (ECB) meeting, Asmara Jamaleh, a researcher at Intesa Sanpaolo Bank, maintains a cautious stance on revising his euro forecasts higher.

While the ECB's actions and revised inflation projections have supported the currency's recent appreciation, Jamaleh believes it is still premature to raise the forecasts, given uncertainties surrounding the Federal Reserve's decisions.

The euro experienced a significant surge against the US dollar (USD) in the aftermath of the ECB meeting with the EURUSD exchange rate reaching a high of 1.0962 from a low of 1.0802.

As anticipated, the ECB implemented a 25 basis point rate hike, bringing the refi rate to 4.00%.

Moreover, the central bank's upward revision of inflation forecasts provided further support for the euro, potentially paving the way for a more aggressive rate hike path than what the market had priced in.

Jamaleh says developments support Intesa Sanpaolo's forecast for two further rate hikes, in July and September."

While the recent movement of the exchange rate has approached Intesa Sanpaolo Bank's near-term target of 1.09 on a 1-month horizon, Jamaleh suggests considering a potential revision to at least 1.10.

However, considering the uncertainty surrounding the Fed's decisions beyond the July FOMC meeting and the risk of confirming the Fed's projection of a second hike, the bank maintains its one-month forecast of EUR/USD 1.09.

This indicates the possibility of a partial and temporary retracement of the euro before resuming its upward trajectory if the Fed proceeds with an additional 50 basis point rate hike.

Jamaleh notes, "Risks to the forecast for the exchange rate are skewed upwards, i.e., the euro could prove stronger and reach the EUR/USD 1.10 mark sooner than expected."

Above: EURUSD at daily intervals.

In the longer term, Intesa Sanpaolo Bank's forecast remains unchanged, projecting EUR/USD at 1.11-1.12-1.14 on a 3-month, 6-month, and 12-month horizon.

While the recent ECB meeting and the resulting exchange rate movements have been encouraging for the euro, Jamaleh emphasises the need for caution and further monitoring of the Fed's decisions before revising the currency's forecasts.