Euro forecast: EURUSD at 2023 lows, trading around 1.05

Dollar pressure drives EUR/USD to 1.05, analysts see euro slipping further

The euro (EUR/USD) was trading around $1.05 on Thursday, nearing levels not witnessed since December 2022. The currency pair appears to be dominated by the overall strength of the U.S. dollar, which is in turn driven by the Federal Reserve’s hawkish leanings and expectations of prolonged higher interest rates in the United States — a stance that has been widely referred to as “higher for longer”.

Inflation data within the eurozone has portrayed a mixed picture: inflation in Germany slowed slightly more than anticipated, reaching its lowest point since the onset of the Ukraine conflict. Spain, however, saw inflation accelerating for the third consecutive month. The recent surge in oil prices, spurred by tight global supply on OPEC+ production cuts and U.S. stock drawdowns, has also compounded concerns about the potential for an inflationary spiral.

Market sentiment is currently leaning towards the belief that the European Central Bank (ECB) is unlikely to pursue additional interest rate hikes within the remainder of the year — even though interest rates are expected to remain elevated for the foreseeable future.

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EURUSD news: German inflation slows, eurozone economic sentiment falls for fifth straight month

In September 2023, German consumer price inflation declined to 4.5% year-on-year, marking a significant drop compared to the previous month's 6.1% and slightly below the market's anticipated rate of 4.6%, as per a preliminary estimate. This represents the lowest inflation rate since Russia invaded Ukraine in February 2022.

Spanish headline inflation, however, rose for the third consecutive month, with the preliminary estimate for September showing a rate of 3.5% — up from 2.6% in August. Meanwhile, core inflation has decreased slightly, falling from 6.1% last month to 5.8%, as per data from Spain’s statistics service INE.

Economic sentiment in the eurozone declined for the fifth consecutive month, albeit slightly less than anticipated, due to decreased optimism in the services, retail, and consumer sectors. The industrial sector, however, saw an improvement after seven months of decline.

According to the European Commission's monthly survey released on Thursday, economic sentiment in the 20 eurozone countries dropped to 93.3 points in September — down from a revised 93.6 in August. This reading was slightly better than the expected decline to 92.5 points, as predicted by economists surveyed by Reuters.

The U.S. dollar index (USDX), which monitors the strength of the greenback against six major currencies, retraced slightly from its strongest position since November on Thursday. The dollar's rise has brought the Japanese yen close to a level that could trigger intervention and pushed the euro to its lowest point in eight months, all while U.S. longer-term bond yields continued to climb.

The dollar index saw a 0.3% decline on the day, trading at 106.3. However, it remained poised for an 11th consecutive week of gains and was just off its 10-month peak reached on Wednesday.

The euro, which has been on the receiving end of the dollar’s strength, rebounded somewhat, advancing 0.33% on the day to reach $1.0537 on Thursday. Nevertheless, it remained in proximity to its January low of $1.0482. A breach below this level would lead to its lowest point this year.

Hardman said the euro was weakening, partly because of the stronger dollar on the back of higher U.S. yields and also because of "the cyclical divergence story: the U.S. economy has been more resilient while the European economy has been weaker."

EURUSD forecast: Strong dollar streamrolls euro, “no reason” to fight bearish trend yet, analysts say

Chris Turner, Global Head of Markets at Dutch bank ING, wrote that the euro will likely continue further on its bearish trajectory in his FX Daily overview on Thursday:

Turner’s ING colleague Francesco Pesole said the bank estimated the euro to dollar rate to bottom out at 1.02 should U.S. bond sell-off continue:

Analysts at Dutch multinational banking group Rabobank revised their EUR/USD forecasts on Thursday, and issued a projection similar toING, saying the euro to dollar rate would likely move to 1.02:

In their latest FX Snapshot on September 25, analysts at Citibank Hong Kong were fairly optimistic in their euro forecast, saying the ECB would likely keep rates higher longer than the Fed, providing potential support for the single market currency in the longer term:

Citi’s 3-month euro to dollar forecast was relatively bullish, considering the current rate of $1.059, placing the EUR/USD exchange rate at a potential average of $1.08. The 6-to-12-month forecast was bearish, suggesting that the euro to dollar rate could drop back down to $1.06, according to the bank.

The bank's long-term projection for EURUSD was bullish, projecting the pair to recover and trade at a potential average of $1.20.

A comment from UBS analysts cited by FXStreet indicated the currency pair may be dollar-dominated until year-end. UBS also added that the narrative of the Fed cutting rates before the ECB is questionable:

EUR/USD traded at $1.0534 at the time of writing, up 0.28% on the day.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.