Euro to Dollar Rate Rebound Might be Over: Credit Suisse

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The Euro to Dollar exchange rate has rebounded from multi-year lows over the duration of the past week, but this still appears to be a corrective rebound according to analysts.

New research from Credit Suisse suggests the rise in EUR/USD from 1.0348 on May 13 to 1.0680 today is thus far consistent with recent corrective rallies.

"We do not yet feel the 'heavenly stars' are aligned for persistent USD weakness," says Credit Suisse's Head of FX Research Shahab Jalinoos.

Above: "EUR strength is in line with recent corrective rallies in 2022" - Credit Suisse. Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service.

Jalinoos concedes that recent drivers of the EUR/USD rebound are nevertheless justified, these include: a downward mood shift for the U.S. economy and a material upgrading in ECB rate hike expectations for 2022.

Euro exchange rates shot higher at the start of the week when ECB President Christine Lagarde wrote on the ECB's website that a July hike is now justified while signalling a further hike by September was also necessary.

"The market is actively pricing in the possibility of 50bp rate hikes, something we would not have expected as possible until very recently. This has given EUR and also CHF a shot in the arm," says Jalinoos.

Nevertheless he reminds us the Euro is still a pro-cyclical, pro-trade currency in a world where global growth expectations are being cut.

"So the bottom line is that the case for ECB rate hikes, while boosted by inflation risks, is not entirely immune from growth risks," he says.

From the U.S. Dollar side of the EUR/USD equation, what the Fed does from here matters.

"As far as Fed pricing goes, the evidence that inflation will actually slow sharply enough to change Fed trajectory is still missing," says Jalinoos in a recently published currency research briefing.

Credit Suisse economists say U.S. consumers still have strong balance sheets and that a still-strong employment story combined with tax refunds in the second quarter will keep the economy ticking along even if asset markets are choppy.

"In short, we do not yet see enough weakness in U.S. data, and especially weakness that’s specific to the US economy, to prompt us to change our broader USD view based on US events alone," says Jalinoos.

Credit Suisse say however that their long-held current EUR/USD 1.0340 target is now likely to be a tough support level to crack, suggesting a fall to parity is not the shoe-in many currency analysts had been suggesting just last week.