(News Bulletin 247) – Research departments estimate that the greenback should weaken in the coming months. The euro could thus find itself in contact with 1.15 dollars or even 1.20 dollars.

After alternating several phases of declines and rises against the greenback this year, the euro has recently regained ground. Over one month, the euro zone currency regained 1.7%

against the dollar, and is now trading at 1.1154 dollars and even recently exceeded 1.1240 dollars, a level not seen since February 2022. And over the year as a whole, the euro has gained nearly 4.2% against the greenback (and more than 9% over one year).

Beyond the euro, the DXY index, which measures the evolution of the currency across the Atlantic against a basket of currencies, has dropped 2.8% since January 1.

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To return to the euro-dollar pair, the rise was mainly triggered last week by inflation figures in the United States for the month of June, which were significantly below expectations, both in terms of the overall figure and the “core” index (excluding food and energy prices).

Modified market expectations

This led market operators to revise their expectations of rate hikes from the US Federal Reserve (Fed). If, for next week, a new increase in key rates of 25 basis points (0.25 point) already appears to have been confirmed by the market – investors are counting 99.8% on this scenario according to the CME Group’s FedWatch tool – the debates are more open for the future. Also according to the FedWatch tool, operators attribute a probability of more than 80% to a status quo on rates at the next meeting, in September. The idea of ​​a fall during the year is even slowly beginning to seem possible in the eyes of the market.

“This (last week’s inflation data release) may not prevent the Fed from raising rates another 25 basis points at its July 26 meeting, but it does increase the likelihood that this will be the last rate hike of this cycle,” sums up payments specialist MoneyCorp.

It is also following these statistics that several analysts advised or confirmed to buy the euro against the dollar.

“US inflation is the last piece of evidence we’ve been waiting for to recommend a long position in the eurodollar. We’re targeting $1.1500 per euro by the end of 2023,” Georges Saravelos, co-head of currency research at Deutsche Bank, said in a note released last week. The specialist also believes “quite possible” that the euro will move within a range of 1.15 dollars to 1.20 dollars by the end of the year.

UBS for its part anticipates for its part a eurodollar at 1.14 at the end of December, then 1.16 at the end of March 2024 and 1.18 at the end of June of the same year.

Monetary policy divergence

Analysts’ expectations are mainly based on the fact that the slowdown in the rise in prices shows that the United States is now very close to the end of the monetary tightening cycle or even an upcoming rate cut, which is less the case for the euro zone with the European Central Bank (ECB). “The period of uncertainty, during which the markets have revalued the terminal rate (from the Fed, editor’s note) on several occasions, should end soon,” judged UBS. As a result, the Swiss bank’s forecast reflects the idea that “the dollar is expected to weaken as the Fed should begin to ‘step the brakes’ on the monetary policy level” while “the ECB will remain restrictive”.

For Deutsche Bank, the process of disinflation, that is to say a fall in inflation (not to be confused with deflation, which corresponds to a general fall in prices) is “on the right track”. “We argue that the worst case outcome for the dollar is a combination of lower US inflation and relatively stable growth conditions. In a world where supply is improving, these two phenomena can occur simultaneously”, adds the German establishment.

A deterioration in the global economy, if it were to occur, could however weaken the euro against the dollar or more precisely strengthen the American currency, because the latter would benefit from its status as a safe haven. In any case, this is the hypothesis formulated by Capital Economics. The think tank thinks all developed economies are headed for a recession this year. This would penalize risky assets such as equities but also most currencies.

“Even the relatively mild recession that we are forecasting could therefore lead to a significant deterioration in investors’ appetite for risk. This is why we continue to forecast fairly poor results for equities until the end of the year and believe that the safe haven US dollar will recover, “anticipates Capital Economics.