Euro forecast lower as ECB to announce interest rate decision

The euro to dollar rate traded at $1.0586 on Wednesday — a drop from its recent one-month peak of $1.0693 — as investors reacted to Purchasing Managers Index (PMI) data that fell short of expectations and prepared for an upcoming European Central Bank (ECB) meeting scheduled for Thursday afternoon.

The latest surveys indicate that Eurozone business activity in October saw the most significant contraction since November 2020, primarily due to substantial declines in both the service and manufacturing sectors.

As for monetary policy, markets are expecting the ECB will maintain its current interest rates after a series of ten consecutive rate hikes that have raised borrowing costs to multi-year highs. In September, the ECB hiked its key interest rates by 25 basis points, pushing the deposit rate to 4.00% and the refinancing rate to 4.50%. However, the central bank indicated that the 10th rate hike in a 14-month-long streak was likely to be its last.

The decision comes as the possibility of a recession looms, and inflation remains well above the European Central Bank’s 2% target.

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EU interest rates: “Some time” needed before easing, says ECB official Philip Lane

The ECB is unlikely to consider any easing measures until at least July 2024, according to economists polled by Reuters from October 12 to October 19. A little over 40% of respondents said the first easing move would come before the ECB Governing Council and ECB President Christine Lagarde meet in July next year.

Some economists saw the first cut coming even later.

"Our model suggests a rate cut may come earlier but we would need to see more subdued data than is currently forecast so I think a cut in September 2024 is quite a balanced view," Kristian Toedtmann at DekaBank told Reuters on October 20.

The view is shared by some of the central bank’s key policymakers — just last week, the ECB's chief economist, Philip Lane, emphasized that it is still “some time” before any consideration of rate cuts.

"I personally will need more information about the wage settlements for 2024, and we will have to wait until spring next year before many countries release that information," Dutch daily newspaper Het Financieele Dagblad quoted Lane as saying on Monday, October 16. "So it’s going to be some time before we can have a high degree of confidence that inflation is on its way back to 2%."

Euro forecast: Bearish forecasts abound

In an updated EURUSD forecast released on October 24, Danske Bank economist Mohamad Al-Saraf indicated that the bank was bearish on the euro to dollar rate, forecasting the pair to trade around 1.03 by late October 2024:

“We maintain the strategic case for a lower EUR/USD based on relative terms of trade, real rates (growth prospects) and relative unit labour costs. Hence, we maintain our 12M forecast at 1.03. Nonetheless, in the near-term, we think there is a possibility of EUR/USD tailwinds due to several factors.

These include US economic data starting to disappoint after an exceptional run of positive surprises, a slight rebound in the struggling manufacturing sector, and a bottoming out of China-pessimism. Escalating geopolitical tensions are a risk.”

Some were even more bearish — Major Wall Street investment banks J.P. Morgan and Citibank recently forecast the euro to dollar to reach parity by the end of the year.

At the time of writing, EURUSD was trading at $1.059 (down 0.01% on the day), as per MarketWatch data. The DXY dollar index traded around 106.34, after gaining 0.06% on risk-off sentiment following a slew of lackluster corporate results that raised concerns over the economic outlook in the U.S.

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