Euro forecast: Dovish Fed leads to uptick in EURUSD

Euro enjoys reprieve on back of softer U.S. yields, Italian risk weighs

The euro to dollar rate (EUR/USD) rebounded to the $1.06 level, moving away from its recent ten-month low of $1.0447 observed on October 3rd. This shift came as investors processed dovish statements from policymakers at both the U.S. Federal Reserve (Fed) and the European Central Bank (ECB).

U.S. bond yields dropped sharply on Tuesday as trading reopened following the Columbus Day holiday. Analysts attributed the decline to remarks from two Fed officials on Monday suggesting that increases in long-term yields could obviate the necessity for additional rate hikes. Additionally, traders sought safe-haven assets amid the conflict involving Palestinian militant group Hamas in Israel.

In Europe, ECB Vice-President Luis de Guindos, in a statement on Monday, said that inflation was expected to continue its downward trend but stressed the need for caution due to uncertainty surrounding oil price movements in the wake of events in the Middle East.

"The macroeconomic environment is subject to enormous uncertainty... Nobody knows what is going to happen in the future (...) especially after what happened this weekend," De Guindos said.

ECB policymaker Francois Villeroy de Galhau also expressed confidence that inflation would eventually reach the ECB's target of approximately 2% by the end of 2025, notwithstanding the recent violence in Israel.

In an interview with franceinfo radio, Villeroy emphasized the European Central Bank's (ECB) vigilance regarding developments in oil prices. However, he noted that these price fluctuations only contributed a relatively small portion to the overall inflationary landscape, which is still experiencing a "clear" decline overall.

Oil prices eased today following a surge of more than 4% in the preceding session. Traders remained cautious as they closely monitored the potential for disruptions in the oil supply chain due to ongoing war between Israel and the Palestinian Islamist group Hamas.

Some fear that the current hostilities could mirror the impact on oil prices seen during the 1973 Yom Kippur War, when an attack launched on Israel by coalition of Arab states, led by Egypt and Syria led to a major energy crisis in the West.

"I don't think that we are today in a similar situation (as the Kippur War) but we must of course remain very vigilant. It adds to economic uncertainty,” Villeroy said.

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EURUSD forecasts: Analysts’ euro forecasts mixed, ING notes signs of stress in Italian bond market

Chris Turner, Global Head of Markets at Dutch bank ING, wrote that the EURUSD pair could be trading higher if not for “signs of stress” in the Italian bond market. The bank maintains a one-month euro to dollar target of $1.04:

“EUR/USD is enjoying a reprieve on the back of softer U.S. yields. However, it would probably be trading even higher were it not for some emerging signs of stress in the Italian bond market. The 10-year BTP-Bund spread is now sitting at +207bp and even European Central Bank (ECB) officials are debating what kind of levels are serious – 250bp, for example. This and developments in the Middle East have proved a clean negative for EUR/CHF, which fell about 0.6% yesterday. The recent lows at 0.9515/20 beckon, although we would not expect EUR/CHF to go much lower given that the Swiss National Bank very much controls this cross rate.

Unless we are misjudging how much further U.S. bond yields fall, it looks like 1.0600/0610 will prove strong resistance for EUR/USD and the one-month target […] remains 1.04.”

UOB Group economists Lee Sue Ann and Markets Strategist Quek Ser Leang were bullish in their short-term euro to dollar forecast, writing that there was still scope for a move to 1.0630:

“24-hour view: We noted yesterday ‘there does not appear to be any clear directional bias,’ and we expected EUR to trade in a range between 1.0500 and 1.0600. Our view was not wrong, even though EUR traded in a narrower range than expected (1.0518/1.0574). Upward momentum is showing early signs of building. Today, EUR is likely to trade with an upward bias. In view of the mild upward pressure, any advance is unlikely to reach the major resistance at 1.0630 (there is another resistance at 1.0600). In order to maintain the momentum buildup, EUR must stay above 1.0530 (minor support is at 1.0550).

Next 1-3 weeks: Our view from last Friday (06 Oct, spot at 1.0545) still stands. As highlighted, the current price action in EUR is likely part of a rebound that could extend to 1.0630 but is unlikely to break clearly above this level. The mild upward pressure is intact as long as EUR stays above 1.0500 (‘strong support’ level previously at 1.0460).”

At the time of writing, EURUSD was trading at $1.0598 (up 0.26% on the day), as per MarketWatch data. The U.S. dollar index traded around the 106 mark, shedding close to 0.1%.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.