- Considering the return of US dollar strength following recent signals from US Federal Reserve officials about keeping US interest rates high for longer, the EUR/USD currency pair tried to avoid moving below the 1.080 support level.
- This could push bears to move strongly downwards. Recently, the EUR/USD price is stable around the 1.0845 level at the start of trading this week.
What is expected for the EUR/USD price in the coming days?
In this regard, Standard Chartered Bank expects the exchange rate of the euro against the dollar (EUR/USD) to weaken to the psychological support level of 1.05 and will remain at this level over the course of 12 months. Furthermore, Wells Fargo expects a pullback to the 1.06 support level at the end of the third quarter before rebounding to the 1.10 psychological resistance by the second quarter of 2025.
According to forex trading platforms, the EUR/USD pair was unable to challenge the 1.09 level during the week and retreated to the 1.0850 level with narrow ranges dominating. MUFG Bank commented; "Despite the ongoing expectations that the Fed's 'higher for longer' monetary stance is fuelling renewed US dollar strength, this has not yet materialized."
It expects continued relatively low volatility; where it said, "The post-summer holiday data will then dictate the cuts, but we expect a similar path of cuts from the ECB and the Fed by then. Assuming we avoid further inflation pick-up and see more moderation in employment growth, it's hard to see a conviction to differ and hence EUR/USD will remain rangebound."
As for Wells Fargo, “In our view, this correlation between the Fed’s monetary policy outlook and the dollar’s direction is likely to persist over our forecast horizon.” The bank added; “With the Fed shifting to a slightly less dovish stance, we continue to believe that the US dollar rate could rise broadly over the next few months. Once the US Federal Reserve makes a clear pivot to lower interest rates, we believe that downside pressures could build on the US currency, and the downtrend in the dollar could continue throughout most of 2025.
Recently, the minutes of the Federal Reserve meeting released in May indicated that inflation had not retreated further in recent months. According to the results of the economic calendar, the US business confidence PMI data was also stronger than expected, with the services index rising to its highest level in 12 months at 54.8 from 51.3 previously.
According to Standard Chartered Bank, there is room for gains for the US dollar due to the level of interest rates. We remain modestly optimistic about the US dollar rate over the next 1-3 months. Meanwhile, US bond yields began to decline as inflation began to decline again in April, we believe that inflation expectations and bond yields are likely to decline at a gradual pace. Bouts of geopolitical risk are also likely to stimulate cyclical safe-haven demand for the US dollar.
However, Danske sees only a very gradual slowdown in the economy; where the Fed said that a sudden deterioration in Labor market conditions could warrant an early easing of the policy stance, but the drop in layoffs is not sending such signals. We still see the latest data consistent with gradual rate cuts, which we expect to start in September of this year. But she added; "With two CPI reports and US jobs reports ahead of the July Fed meeting, a summer cut could still be on the cards, especially as US data surprises have turned negative. This suggests a bias towards EUR/USD downside, with a slight upside risk."
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EUR/USD Technical analysis and forecast:
Looking at the eurozone, there are still very strong expectations for a rate cut by the ECB in June. However, Danske expects medium-term rate cut expectations to be trimmed. Added, "With activity recovering and inflation steady, we expect the ECB to have a more hawkish monetary policy stance than before." furthermore, MUFG does not expect consecutive cuts; "The data we believe is consistent with going ahead with a rate cut in June (hard to back down now) but likely to skip another cut in July thereafter."
Evidence of a strong Eurozone economy and a tougher stance from the European Central Bank should support the euro. Moreover, ING points to a modest improvement in the German economy; Looking to the future, the German economy should gain further momentum. Ultimately, strong wage growth should trigger a cautious recovery in private consumption, and even the inventory cycle should gradually begin to turn positive. However, this cyclical improvement does not mean that all is suddenly well again in Germany.
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