By Sarupya Ganguly
BENGALURU (Reuters) – The euro will weaken modestly against the U.S. dollar this month before strengthening again towards the end of the year, despite financial markets having priced in two more rate cuts from the European Central Bank by then , according to currency strategists interviewed by Reuters.
After generally underperforming analyst expectations from Reuters surveys over the past year, the euro has fallen more than 1% since French President Emmanuel Macron called for a surprise snap election on June 9.
Subsequently, the party made only a small gain, as Marine Le Pen’s National Rally party won a smaller share of the vote than some polls had initially expected, despite being clearly ahead after the first round of elections on June 30.
Still, the euro, which has fallen more than 2.5% against the dollar so far this year, would show resilience against the backdrop of heightened political uncertainty in the European Union’s second-largest member, currency strategists said in a report from June 28 to July 3. Reuters poll.
The average forecast for how far the stock could fall this month was $1.06, about 1.5% lower than where it was trading on Wednesday.
“Without French election dynamics in the background, we would have expected the euro to be much higher than where it is now,” said Dan Tobon, head of G10 foreign exchange strategy at Citi.
“But based on the polls and market expectations, we don’t really see much downside anymore,” Tobon added.
Further on, the poll showed the euro would strengthen in three months and towards the end of the year, even though a separate poll predicted the ECB would follow June’s rate cut with another two this year – in September and December .
The average forecast of almost 80 currency strategists was for the euro to rise by almost 1.5% to $1.09 by the end of this year and trade at $1.10 by the end of the first half of 2025.
In January, the euro rose to $1.12 by the end of this year, but since then the resilience of the US economy has led financial markets to scale back their expectations for Federal Reserve rate cuts, sending the dollar higher.
Economists in a separate Reuters survey forecast two US interest rate cuts this year, but cited one or none at all as a significant risk that could put pressure on the euro.
“Markets may be overestimating Fed rate cuts and, in the near term, rate cuts elsewhere… There is certainly a risk that the dollar will be stronger than we currently forecast,” said Erik Nelson, a macro strategist at Wells Fargo. Effects.
The dollar has risen more than 4% against a basket of major currencies since January, contradicting expectations that the dollar would weaken that prevailed at the start of the year.
The Japanese yen, which has fallen about 13% this year to a 38-year low of 161.97 against the dollar on Wednesday, will be the biggest gainer among major currencies by the end of the year, with a increase of 6.5% to 152, the poll showed.
So far, Tokyo has mainly relied on market interventions to support the yen, but when asked what authorities could do to halt the decline over the next three months, most analysts said the Bank of Japan would cut interest rates should increase aggressively.
“The longer (the authorities) wait to enter the field, the heavier the intervention must be,” said Roberto Mialich, currency strategist at UniCredit.
(Click here for other stories from Reuters’ July currency survey)