Euro-Dollar Has Further To Fall says Rabobank and Crédit Agricole

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The Euro endured its worst January performance since 2015 after declining by 2.2% against the U.S. dollar, yet further losses are likely, according to leading investment banks.

"The EUR should emerge as one of the biggest G10 underperformers in 2024," says Valentin Marinov, Head of FX Strategy at Crédit Agricole.

The view stands at odds with the consensus in the analyst community at the start of 2024 that expected the Dollar to decline through the course of the year, allowing for a steady recovery in the Euro.

However, the Dollar was 2024's best-performing currency heading into last week's non-farm payroll report, which blew away expectations and prompted a 0.75% fall in the Euro-Dollar.

Losses extended through Monday following a weekend interview with Federal Reserve Chair Jerome Powell, in which he said the Fed would maintain a cautious approach to cutting interest rates.

Then Monday's ISM survey showed a strong rebound in the employment situation at U.S. businesses, further boosting the Dollar.

The net result is the Federal Reserve is almost certain to leave interest rates unchanged in March, disappointing a market that was fully priced for a cut just two weeks ago.

Economists at Rabobank say that the Fed is unlikely to start cutting rates before June, and the Dollar will only start moderating from that point on.

As a result, analysts only expect USD strength from the second half of the year when the Fed's rate cutting cycle kicks off.

Regarding a March rate cut, Powell said, "I think it's not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks".

Above: EUR/USD at daily intervals with forecast target annotated. Track the EUR and USD with your own custom rate alerts. Set Up Here.

"That TV interview message was recorded before Friday’s blowout US January labour report. The implication is that he would likely have doubled down on his message had he been privy to the data," says Jane Foley, Senior FX Strategist at Rabobank.

Rabobank maintains a one-month Euro-Dollar forecast of 1.07 and a three-month target of 1.05.

Crédit Agricole says its bearish EUR/USD outlook is not just a function of Federal Reserve policy, but it reflects an expectation that the ECB could match and even exceed the number of Fed rate cuts it expects in 2024.

Accordingly, this could turn the EUR into an attractive funding currency.

Above: Euro-Dollar forecast from Crédit Agricole.

In addition, the yields on bonds issued by peripheral Eurozone countries are tipped to grow much faster than those of Germany.

This widening in yield spreads is expected to accelerate from here as the ECB’s Quantitative Tightening programme accelerates and weighs on the Euro's appeal.

Crédit Agricole also expects markets to become more risk-averse in the second half of the year thanks to a cloudier economic growth outlook and political uncertainty in the U.S.

Taking these factors together and applying it to a model leads Crédit Agricole to confirm an expectation "that the EUR should emerge as one of the biggest G10 underperformers in 2024."

The bank forecasts the Euro-Dollar exchange rate to be at 1.07 by mid-year and 1.05 by year-end.