Strategists at Deutsche Bank and Morgan Stanley forecast the euro could rise to $1.1500 from a current 7-month peak of around $1.0760 reached in the last three trading days (the single currency’s highest level since June 2022
Bank Nomura International, on the other hand, forecasts a rise in the euro to $1.1000 by the end of the month, while Gareth Gethinby of Aegon Asset Management plans to add to his long position in the common European currency.
This represents a dramatic shift in sentiment from 2022, when the euro collapsed to and below parity against the dollar. However, mild winter weather across the continent has removed doomsday economic scenarios, giving investors the confidence to return to European assets.
Trends outside Europe also support the thesis of an appreciation of the euro against the dollar. Many investors expect the US dollar to weaken, especially if US inflation eases and the Federal Reserve nears the end of its rate-tightening cycle. The rapid pace of China’s reopening after abandoning the “zero Covid” policy is also believed to be helping the European economy as they reduce disruptions to supply chains, Bloomberg notes.
“The risks of lowering the euro decrease with the lower prices of natural gas,” commented Gethinby, a portfolio manager at Aegon, to the agency. “European (positive) economic surprises continue to strengthen, while in the US they decline”.
However, there are still concerns that Russia could step up its offensive in Ukraine and that persistently high energy prices could stunt economic growth. Stronger inflation or economic data in the US could also trigger another bout of dollar strengthening at the expense of the euro if the Fed sticks to an aggressive rate hike stance.
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Bank strategists JPMorgan Chase & Co. are still cautious about the trajectory of the economy, but say a more aggressive European Central Bank on interest rates will support the euro.
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Money markets indicate the ECB will tighten its key interest rates by around 150 basis points this year, while the Fed is expected to raise them by another 60 basis points. Traders await key US inflation data in December for further evidence that price pressures are easing.
“Pieces Are Lining Up for More Sustained Dollar Decline”, noted George Saravelos, head of FX research at Deutsche Bank, outlining his bullish stance on the euro.
“Two key drivers of the dollar’s safe-haven appeal – Europe’s energy shock and China’s ‘zero Covid’ policy – have reversed. Ultimately, the Fed’s fulcrum (in terms of raising interest rates, which supports the dollar) is the last missing link”.
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