EUR/USD: Danske Bank forecasts euro to fall to 1.03

US inflation surprises contribute to a downward trend in EUR/USD, with Danske Bank forecasting long-term dollar strength.

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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