Danske Bank Forecasts Euro to Strengthen Against the Dollar: EUR/USD Seen at 1.23 in 12 Months
Written by: Adam Solomon (Source: ExchangeRates.org.uk)
As global foreign exchange markets remain volatile amid fluctuating interest rate expectations and economic uncertainties, Danske Bank, one of Europe’s leading financial institutions, has released its updated forecast for the Euro to US Dollar (EUR/USD) exchange rate. According to their latest projections, Danske expects the pair to reach 1.23 within the next 12 months, a significant upward shift from current levels near 1.07.
This prediction stems from the bank’s macroeconomic outlook, which includes expectations of monetary policy divergence between the Federal Reserve and the European Central Bank (ECB), economic recovery prospects in the Eurozone, and a general normalization in global risk sentiment.
Below is a deeper dive into the rationale behind Danske Bank’s forecast, how it compares with other financial institutions’ projections, and what it could mean for investors, businesses, and travelers involved in euro-dollar transactions.
Key Highlights from the Danske Bank EUR/USD Forecast
– Target Rate: 1.23 within 12 months from October 2024
– Current EUR/USD Rate (as of October 2024): Roughly 1.07
– Main Drivers: Anticipated Fed rate cuts, stabilization in Eurozone economy, softening of U.S. economic data
– Time Horizon: Forecast period covers Q4 2024 to Q4 2025
Macroeconomic Backdrop
According to Danske Bank, the exchange rate forecast is largely driven by the evolving monetary policy stance from the Federal Reserve and the ECB. The bank expects the Federal Reserve to begin an interest rate-cutting cycle over the coming quarters as the U.S. economy shows increasing signs of softening in both growth and inflation. This easing of monetary policy is expected to weaken the dollar as yield spreads narrow between the U.S. and the Eurozone.
Meanwhile, although the ECB has also begun lowering interest rates, the pace of cuts is expected to be more gradual compared to the Fed. Danske believes the economic damage in the Euro area has plateaued and is likely to recover moderately, aided by falling energy prices, stabilized inflation, and more accommodative fiscal policy in several member states.
“Markets are becoming increasingly convinced that the tightening cycle is over in the U.S.,” said one of Danske Bank’s lead FX strategists. “We expect the Fed to begin easing well before the ECB, creating a period of USD weakness, which supports a higher EUR/USD.”
Rate Path Outlook: Federal Reserve vs European Central Bank
Danske’s rate expectations differ slightly from market-consensus views and those of other financial institutions. According to the bank:
– The Fed is projected to deliver up to 100 basis points (bps) in rate cuts during 2025
– The ECB is expected to reduce interest rates by about 50 bps over the same period
– These widening relative interest rate differentials are set to push the EUR/USD exchange rate higher
Inflation in the U.S. has decelerated faster than in the Eurozone, thereby giving the Fed more room to pivot earlier. The softening U.S. labor market, dwindling consumption growth, and lower producer prices are all factored into Danske’s assumption that the Fed will act sooner and more decisively than the ECB.
Eurozone Economic Recovery Still a Key Variable
While the Eurozone has faced stagnating growth in recent quarters, Danske believes the worst phase may be over and that the continent could see modest economic gains into 2025. Several supportive factors include:
– A tapering off of geopolitical risks in energy supply, particularly surrounding Russia-Ukraine tensions
– Stabilized consumer sentiment in key economies like Germany, France, and Italy
– Easing inflationary pressures across the Euro Area, giving more spending power to consumers
– A pickup in global
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