July 3 2024: The euro is anticipated to weaken slightly against the U.S. dollar this month before strengthening by year-end, even as financial markets expect two more European Central Bank interest rate cuts by then, according to currency strategists polled by Reuters.
Despite generally underperforming analyst expectations in Reuters surveys over the past year, the euro has fallen more than 1% since French President Emmanuel Macron called for a surprise snap election on June 9. It only gained slightly when Marine Le Pen’s National Rally party won a smaller share of the vote than some polls had projected, despite emerging as a strong contender after the election’s first round on June 30.
Nonetheless, the euro, which has declined more than 2.5% against the dollar so far this year, is expected to show resilience against the backdrop of heightened political uncertainty in the second-largest European Union member, according to currency strategists in a June 28-July 3 Reuters poll.
The median forecast for the euro’s potential fall this month is $1.06, about 1.5% below its trading value on Wednesday.
“If not for the French election dynamic in the background, we would have expected the euro to be much higher than where it is at the moment,” said Dan Tobon, head of G10 foreign exchange strategy at Citi. “But based on where the polls and market expectations are, we don’t really see a lot of downside left,” Tobon added.
Looking ahead, the poll indicated that the euro would strengthen in three months’ time and by year-end, even though the ECB is expected to follow up its June rate cut with two more this year—in September and December. The median projection from nearly 80 foreign exchange strategists is for the euro to gain nearly 1.5% to $1.09 by the end of this year and to trade at $1.10 by the end of the first half of 2025.
In January, the euro was predicted to climb to $1.12 by year-end, but the resilience of the U.S. economy has led financial markets to scale back their expectations for the Federal Reserve’s rate cuts, bolstering the dollar.
Economists in a separate Reuters survey predicted two U.S. rate cuts this year but flagged one or even no rate cuts as a sizeable risk, which could pressure the euro. “Markets may be over-pricing Fed rate cuts and in the short term, rate cuts elsewhere too …There certainly is a risk we see more dollar strength than we’re currently forecasting,” said Erik Nelson, macro strategist at Wells Fargo Securities.
The dollar has gained more than 4% against a basket of major currencies since January, defying expectations of weakness prevalent at the start of the year.
Japan’s yen, down about 13% for the year to a 38-year low of 161.97 to the dollar on Wednesday, is projected to be the biggest gainer among major currencies by year-end, rising 6.5% to 152, the poll found.
Tokyo has primarily relied on market interventions to support the yen, but when asked what authorities could do to arrest its decline over the coming three months, most analysts said the Bank of Japan would need to hike interest rates aggressively. “The longer (authorities) wait to take the field, the heavier the intervention has to be,” said Roberto Mialich, currency strategist at UniCredit.
(For other stories from the July Reuters foreign exchange poll click here)
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