Euro-Dollar: "Tactically Bearish, Strategically Bullish"
- Written by: Gary Howes
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A new exchange rate forecast update from Danske Bank reveals a "tactically bearish, strategically bullish" stance on the euro to dollar exchange rate (EUR/USD).
The call seems somewhat contradictory and cynics would say it's the speak of an analyst trying to cover all bases when predicting the EUR/USD path.
However, there's some crucial nuance here: it recognises the euro-dollar is going to endure different fortunes over different timeframes, meaning it holds significant value for those with exposure to the exchange rate.
Those with euro-dollar payments would do well to take heed.
Because if you describe yourself as "Tactically Bearish, Strategically Bullish" on the market, you're expressing a two-timeframe view of the market.
Specifically, a "tactically bearish" stance expects the euro to weaken against the U.S. dollar in the near term. A "strategically bullish" pose meanwhile expects the euro to strengthen versus the dollar over time.
"EUR/USD has generally trended lower since our latest update. We think this trend could continue in the near term," say analysts at Danske Bank in a new forecast update.
It says the near-term balance of risks remains tilted toward further USD strength, supported by continued short-covering, resilient U.S. cyclical momentum, and favourable near-term rate differentials.
Driving USD-favourable rate differentials is the Federal Reserve, which could be set to disappoint market expectations for two further interest rate cuts in 2025 by only delivering one further cut, owing to a resilient economy.
Sure, the ECB is likely to keep rates unchanged, but one less cut from the Fed would shift the dial in the dollar's favour.
Nevertheless, over the coming months, the Fed should still cut more than the ECB, which supports the longer-term trend of EUR/USD appreciation.
"However, any USD strength is likely to be tactical, as we continue to see EUR/USD on an upward trajectory, supported by rate differentials, a recovering European asset market, reduced global demand for restrictive policy, continued tailwinds from hedge ratio adjustments, and waning confidence in U.S. institutions," says Danske Bank.
The bank's 12-month euro-dollar forecast target is 1.22.
