Title: ING Suggests USD Weakness May Propel EUR/USD Toward 1.20
Source Credit: Original article by Eamonn Sheridan, published on ForexLive via TradingView
As the financial world continues to digest key macroeconomic signals and shifting central bank narratives, ING’s latest observations indicate a growing probability of extended US dollar weakness. According to analysts at ING, this trend may potentially push the EUR/USD currency pair all the way towards 1.20, a level not seen since early 2021. This projection is rooted in both fundamental and technical analyses tied closely to market movements, economic performance indicators, and anticipating future policy changes.
The USD’s recent trajectory shows signs of vulnerability, and this changing outlook carries significant consequences for the world’s most traded currency pair. Here’s a deep dive into the underlying factors contributing to this scenario, and why ING foresees a favorable environment for extended upside in EUR/USD.
Macroeconomic Shifts Support Dollar Weakness
ING’s currency strategy team attributes the expected decline in the US dollar to several interrelated macroeconomic developments unfolding in 2024. These include easing inflation, decelerating growth, and a more dovish tone from the Federal Reserve. The combination of these variables creates downward pressure on the greenback.
Key macroeconomic factors include:
– Signs of cooling in US inflation data, particularly core PCE and CPI
– Slowing labor market figures, with falling job openings and moderating wage growth
– Reduced consumer spending amidst tightening credit conditions
– Expectations for rate cuts from the Federal Reserve beginning in the second half of 2024
The US economy is transitioning from a period of resilient expansion to one of moderated growth. While not pointing to imminent recession, this shift erodes one of the key pillars supporting the stronger dollar over the past couple of years.
Federal Reserve’s Policy Trajectory Promotes Further USD Weakness
One of the dominant narratives guiding the forex markets in mid-2024 is the potential pivot in the Federal Reserve’s monetary policy. After a historic rate hiking cycle that peaked in 2023, the Fed now appears increasingly inclined towards easing, especially if inflation data continues to move toward its 2% target.
ING anticipates the Fed could initiate rate reductions as soon as September 2024. This forecast is aligned with increased dovish rhetoric from key Fed officials and a market already pricing in rate cuts through fed funds futures.
The reasons behind the shift include:
– Inflation declining consistently over several months
– Real rates remaining elevated due to falling inflation without nominal cuts
– Rising concerns over financial stability and economic deceleration
– International pressures from other central bank tightening or divergent economic performance
If realized, this dovish shift would significantly reduce the appeal of holding dollar-denominated assets due to lower yields. Moreover, the unwinding of long USD positions by global investors adds to the downward momentum.
European Central Bank Positioning May Present Limited Drag on EUR
While monetary policies in Europe are also shifting, with the European Central Bank (ECB) initiating its own easing cycle, ING argues that the impact of lower ECB rates on the euro may be more muted compared to the Fed’s pivot.
Several points underlie this argument:
– The ECB has signaled a cautious approach to rate cuts, with likely slower pace and more conditional decisions
– Core inflation in the Eurozone remains slightly sticky, keeping rate expectations in check
– Fiscal support in countries like Germany and France may help stabilize domestic demand
– Capital flows into Eurozone equities and fixed income products are increasing, boosting euro demand
Combined, these dynamics suggest the euro may remain relatively resilient or even strengthen further against the dollar, despite the ECB’s dovish moves.
Global Risk Sentiment and Its Impact on Currency Trends
Part of the pressure on the dollar arises from improving global risk sentiment. As fears of a global recession fade, investors are showing greater appetite for higher-yielding and riskier assets, including emerging market currencies and European equities. This generally
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