Danske Bank, Denmark’s largest lender, is forecasting the US dollar to extend its bullish trajectory against the euro over the next 12 months, despite the potential for short-term corrections in the currency pair. The bank projects the EUR/USD rate to reach 1.03 within a year, underpinned by strong US economic fundamentals and vulnerabilities plaguing the Eurozone.
This outlook comes in the wake of surprisingly elevated US inflation readings that have driven the EUR/USD lower, with the pair recently hitting a five-month low just above 1.06. The dollar’s resurgence reflects a notable paring back of expectations for aggressive Federal Reserve interest rate cuts, with markets now pricing in fewer than two 25-basis point reductions for 2024, down from as many as six previously factored in. The odds of a June move have fallen below 20%.
While acknowledging the uncertainty surrounding their forecast, Danske Bank maintains that a June rate cut from the Fed remains a realistic prospect, suggesting that market concerns regarding the Fed’s rate trajectory may have been overstated, potentially limiting any near-term retracement in the greenback.
Looking further out, the Danish bank reiterates its confidence in the dollar’s longer-run rise against its European counterpart. Underpinning this view are the US economy’s relative outperformance versus a more fragile Eurozone, coupled with the potential for tighter global financial conditions – factors that could further bolster the US dollar’s strength.
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