Top forecaster says euro-dollar decline could be limited from here
– EUR / USD removed by gravity near 2021 low
– But the best forecaster suggests that the decline is limited
– EUR / USD could hit a low in the 1.1500 region
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- Reference rate EUR / USD at publication:
- Location: 1.1610
- Bank transfers (indicative guide): 1.1199-1.1280
- Specialist money transfer rates (indicative): 1.1500-1.1547
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- Set up an exchange rate alert, here
The euro-dollar exchange rate fell back below 1.16 and was approaching its 2021 low earlier this week, but was recently reiterated, and so far the point forecast from BofA Global Research suggests that any further decline in the single currency could be somewhat limited. .
The single European currency traded as low as 1.1580 against the dollar in Tuesday’s first session in October, bringing it closer to the 2021 low of 1.1562 set in the waning light of September and in a market that has turned more willing to consider bullish ideas on the US greenback in recent months.
This was after a historic change in the Federal Reserve’s monetary policy stance in June, which continued into September when President Jerome Powell signaled that the Fed may end its quantitative easing program to ‘by the middle of next year and potentially even raise interest rates at the end of 2022..
âWe continue to expect the USD to appreciate against a lower beta FX, especially the EUR. The fact that the market is well below the Fed’s new rate projection reinforces this, âsays Athanasios Vamvakidis, head of currency strategy at BofA Global Research.
“The EURUSD consensus forecast has adjusted from 1.25 at the start of the year to 1.18 this year and to 1.20 next year. We stick to our forecast of EURUSD 1.15 for this year. year and the next, âVamvakidis and colleagues wrote in a late September review of BofA’s forecasts.
As the dollar has strengthened and the euro has weakened in recent weeks, BofA’s global research team notes that U.S. and other bond yields do not yet fully reflect the extent to which interest rates Americans could rise once the Fed begins to hike the fed funds rate. close to zero.
Above: Euro-dollar rate and US dollar index displayed at 4-hour intervals.
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The September dotted line forecast by members of the Federal Open Market Committee suggested that the Fed Funds rate could reach 1.75% or more in 2023 and that it would likely exceed 2% in 2024, implying a long rise from the September target range is between 0% and 0.25%.
Meanwhile, the European Central Bank’s forecast suggests a high probability that it will not have raised the euro zone’s deposit rate by -0.50% at all by then.
“The euro has weakened so far this fall, in line with our forecasts,” said Vamvakidis.
âThe December ECB meeting is in our view the biggest known unknown for the euro for the rest of the year. Our call for the Asset Purchase Program (APP) to replace the PEPP, with a monthly procurement envelope somewhere midway between the two programs, broadly corresponds to what the markets are expecting â, adds- he.
As the dollar may appreciate further and lead the euro to set new lows for 2021, Vamvakidis and BofA’s global research team expect the euro-dollar rate to stay close. from the level of 1.15 until the end of the year and until 2022.
This outlook neither excludes nor precludes minor and short-lived deviations below this level, but suggests that any further loss seen by the single currency could be quite limited until the end of 2021, or even next year. .
“We expect the EURUSD to gradually appreciate to 1.20 – the lower end of the equilibrium range – only in 2023. In general, after the dollar’s strength in the short term and a mostly flat 2022, we expect a return to a longer term equilibrium thereafter, âVamvakidis wrote. in a note to customers last week.
These forecasts are notable not only because of what they imply on the outlook for the single currency, but also because of BofA Global Research’s track record in forecasting, particularly throughout 2021.
The single currency entered the year around 1.2236, but after peaking at 1.2350 on January 6, it quickly declined to end the quarter around 1.1723, which is a median average of d ‘just over 1.20, in line with the bank’s outlook.
But after seeing the euro on track for this projection in the middle of the first quarter, BofA Global Research quickly lowered its forecast for the remainder of 2021 and began to push the single currency down to 1.18 in June, 1, 16 in September and 1.15 in June. end of the year.
With the exception of the year-end projection – which was almost seen at the start of October, each of these predictions was on the money and the bank has shown conviction in supporting them firmly throughout. of the year despite a scare in the second quarter during which the Euro-dollar returned above 1.20 to almost hit the handle of 1.23 at the end of May.
Above: Euro-dollar rate shown at daily intervals with major moving averages.