More hawkish global central bank policy actions have increased reservations over the global economy and the latest Euro-Zone data was also significantly weaker than expected.
Weaker risk conditions will also tend to weaken the Euro, especially with scope for defensive dollar demand.
In this context, confidence in the global economy will need to rebound for EUR/USD to secure gains much above 1.1000.
US Dollar (USD) Exchange Rates Forecast - US Economy in the Limelight
The Federal Reserve remains determined to maintain a hawkish policy stance and expects interest rates to increase further, especially with stubborn inflation in the services sector.
The US economic developments will, however, be a key element.
The manufacturing data has remained weak while services-sector growth has remained strong.
The US PMI manufacturing index dipped to a 6-month low of 46.3 for June from 48.4 previously and below expectation of 48.5.
The services-sector index edged lower to a 2-month low of 54.1 from 54.9 and in line with expectations.
Within the data, overall selling prices increased at the slowest rate since October 2020. Manufacturing prices increased at the slowest rate for three years with services-sector increases at 5-month lows.
MUFG still considers that the labour market is showing important signs of weakness.
It notes; “evidence is building that we are close to a turn toward weaker employment data. It is already becoming clearer in the claims data.”
Initial claims have been above 260,000 for three consecutive weeks for the first time since October 2021. Excluding the covid period, it is the highest level since September 2017.
The bank also points to the underlying increase in continuing claims and added; “every time continued claims increases to the degree most recently (570k), the US labour market weakens notably and recession follows.”
According to the bank; “Our current EUR/USD forecasts are 1.0900 in Q2 and 1.1300 in Q3 which reflects our view of a turn in the jobs data that intensifies once again recession fears and strengthens expectations of rate cuts at the back-end of this year and in 2024, which will help fuel renewed dollar selling.”
Euro (EUR) Exchange Rates Dominated by Euro-Zone Reservations
Confidence in the Euro-Zone outlook remains fragile and the latest PMI business confidence data was weaker than expected. The manufacturing index dipped to a 37-month low with a 5-month low for services.
Socgen expressed some reservations over the data; “The only caveat is that the European PMI data aren’t a very useful gauge of what’s happening to the economy, and should be treated with some scepticism.”
Nevertheless, it added; “A return to 1.06 is a significant risk.”
According to Berenberg; In the longer term, we remain moderately optimistic for the euro. However, the economic weakness in the Eurozone is hampering the recovery. We have therefore adjusted our currency forecast slightly downwards and only expect a EUR/USD exchange rate of 1.12 (previously 1.15) by the end of the year.”
Credit Agricole also sees barriers to further Euro gains; “the EUR rate markets have already priced in some ECB tightening beyond July, suggesting that positives are already in the price of the currency.
The bank sees other hurdles; “In addition, the EUR remains the biggest long in the G10 FX market while the broad EUR NEER that the Governing Council uses to gauge the currency's strength across the board has moved very close to its 2009 record high.”
Danske Bank expects the Euro will struggle; “In the euro area, there have been some weakening signs in macro data as of late, which we expect to become even more pronounced in H2, as the full impact of last year’s monetary policy tightening hits the real economy.”
It adds; “Overall, we think the US economy will prove more robust relative to the European counterpart in H2.”
It has a 6-month EUR/USD forecast of 1.0600.
According to ANZ; “A relatively more hawkish ECB, with more work to do in taming inflation, could bring about some upside in the EUR vs the USD in H2 2023. However, given that economic data surprises in the Euro-area are turning negative relative to the US, we believe that any upside in the EUR will be capped at 1.12 in Q3.
ANZ added; “We also think that any rally in the EUR will likely be driven by USD-related factors.”
Weaker risk conditions will also tend to weaken the Euro, especially with scope for defensive dollar demand.
In this context, confidence in the global economy will need to rebound for EUR/USD to secure gains much above 1.1000.
US Dollar (USD) Exchange Rates Forecast - US Economy in the Limelight
The Federal Reserve remains determined to maintain a hawkish policy stance and expects interest rates to increase further, especially with stubborn inflation in the services sector.
The US economic developments will, however, be a key element.
The manufacturing data has remained weak while services-sector growth has remained strong.
The US PMI manufacturing index dipped to a 6-month low of 46.3 for June from 48.4 previously and below expectation of 48.5.
The services-sector index edged lower to a 2-month low of 54.1 from 54.9 and in line with expectations.
Within the data, overall selling prices increased at the slowest rate since October 2020. Manufacturing prices increased at the slowest rate for three years with services-sector increases at 5-month lows.
MUFG still considers that the labour market is showing important signs of weakness.
It notes; “evidence is building that we are close to a turn toward weaker employment data. It is already becoming clearer in the claims data.”
Initial claims have been above 260,000 for three consecutive weeks for the first time since October 2021. Excluding the covid period, it is the highest level since September 2017.
The bank also points to the underlying increase in continuing claims and added; “every time continued claims increases to the degree most recently (570k), the US labour market weakens notably and recession follows.”
According to the bank; “Our current EUR/USD forecasts are 1.0900 in Q2 and 1.1300 in Q3 which reflects our view of a turn in the jobs data that intensifies once again recession fears and strengthens expectations of rate cuts at the back-end of this year and in 2024, which will help fuel renewed dollar selling.”
Euro (EUR) Exchange Rates Dominated by Euro-Zone Reservations
Confidence in the Euro-Zone outlook remains fragile and the latest PMI business confidence data was weaker than expected. The manufacturing index dipped to a 37-month low with a 5-month low for services.
Socgen expressed some reservations over the data; “The only caveat is that the European PMI data aren’t a very useful gauge of what’s happening to the economy, and should be treated with some scepticism.”
Nevertheless, it added; “A return to 1.06 is a significant risk.”
According to Berenberg; In the longer term, we remain moderately optimistic for the euro. However, the economic weakness in the Eurozone is hampering the recovery. We have therefore adjusted our currency forecast slightly downwards and only expect a EUR/USD exchange rate of 1.12 (previously 1.15) by the end of the year.”
Credit Agricole also sees barriers to further Euro gains; “the EUR rate markets have already priced in some ECB tightening beyond July, suggesting that positives are already in the price of the currency.
The bank sees other hurdles; “In addition, the EUR remains the biggest long in the G10 FX market while the broad EUR NEER that the Governing Council uses to gauge the currency's strength across the board has moved very close to its 2009 record high.”
Danske Bank expects the Euro will struggle; “In the euro area, there have been some weakening signs in macro data as of late, which we expect to become even more pronounced in H2, as the full impact of last year’s monetary policy tightening hits the real economy.”
It adds; “Overall, we think the US economy will prove more robust relative to the European counterpart in H2.”
It has a 6-month EUR/USD forecast of 1.0600.
According to ANZ; “A relatively more hawkish ECB, with more work to do in taming inflation, could bring about some upside in the EUR vs the USD in H2 2023. However, given that economic data surprises in the Euro-area are turning negative relative to the US, we believe that any upside in the EUR will be capped at 1.12 in Q3.
ANZ added; “We also think that any rally in the EUR will likely be driven by USD-related factors.”