Image © Deutsche Bank
One of Europe's largest banks has taken a knife to its forecast for the Euro to Dollar exchange rate (EURUSD), however, the exchange rate is still expected to appreciate as 2024 gets underway.
In a new research briefing, economists at Deutsche Bank say they remain neutral on Euro-Dollar from a tactical viewpoint but mark down their forecasts for the currency pair.
A key change made in Deutsche Bank's most recent edition of the monthly "House View" report is the pushing back of the expected timing of a first interest rate cut at the U.S. Federal Reserve.
The Dollar has outperformed peers since late July as markets came around to a view the Fed would keep interest rates at elevated levels for a protracted period.
Market-implied rate cut expectations for 2024 were reduced notably following the Fed's September 20 policy meeting where it kept alive the prospect of a November rate hike, while releasing projections showing the amount of rate cuts it anticipated to fall in the next year were much reduced.
"We push out the timing of Fed cuts, but still anticipate a mild recession will result in more easing than the market is pricing," says Deutsche Bank.
An ongoing resilience in the U.S. economy is meanwhile cited by economists as being behind the need for the Fed to keep rates elevated, which in turn pushes up U.S. bond yields relative to those in the Eurozone and inspires demand for the USD.
"The main reason EUR/USD has failed to break higher this year is the relative outperformance of U.S. growth to Europe," says Deutsche Bank. "The Fed remains the most important catalyst for a move lower in the dollar. While the U.S. inflation picture is looking increasingly benign, outperformance in growth supports the USD."
However, economists reckon growth divergence between the EU and the U.S. has peaked with forward-looking indicators improving in Europe but deteriorating in the U.S.
This can help the Euro-Dollar higher through the turn of the year.
Nevertheless, Deutsche Bank says it marks down its year-end forecast for EURUSD from 1.15 to 1.07 given recent USD outperformance.
The pair is seen higher at 1.15 by the end of the second quarter of 2024 and 1.20 by the end of next year.