Horizon Q4│2023 - Currencies
Reading time:10 MIN
Monetary policy outlook strengthens the US dollar
After a positive outlier to over 1.12 US dollars per euro in July, the euro subsequently came under pressure and fell to below 1.07 by mid-September. The main reason for this euro weakness is a reassessment of the economic situation on both sides of the Atlantic and the resulting change in the monetary policy outlook. The economy in the eurozone is developing sluggishly. Germany, the largest economy in the eurozone, is proving to be a brake. In view of the weak economy, the pressure on the European Central Bank (ECB) to tighten the key interest rate even further is decreasing. The September rate hike is likely to mark the end of the rate hike cycle. In contrast, the US economy is proving to be surprisingly robust despite the strong tightening of monetary policy. The widely feared recession is unlikely to materialise. A soft landing is now likely. This in turn reduces the likelihood of significant interest rate cuts by the Fed in the coming year, which would have been likely in the event of a more severe recession to stimulate the economy. Even a further interest rate hike is not completely ruled out. The bottom line is that in recent weeks the currency market has priced in that the ECB will tighten less and the Fed will ease less next year. The US interest rate advantage would thus not dwindle so quickly.
EUR/USD: Interest rate differential speaks for the US currency
The US dollar benefits from higher interest rates. The current monetary policy outlook argues for a continued interest rate head start
For the time being, the economic framework conditions do not speak in favour of the euro. However, if market players turn their attention to the possible economic revival in the eurozone in the spring towards the end of the year, sentiment could turn in favour of the euro again. In this case, the exchange rate could be somewhat higher again at the turn of the year.
The euro remains on the defensive against the Swiss franc. Since March, the euro has been trading consistently below parity. At around 0.96 francs per euro, the gap to parity is now considerable. Besides being a safe haven, the franc benefits from the policy of the Swiss National Bank (SNB). It has committed itself to a policy of a strong franc in order to fight inflation – with success: since June, Switzerland's inflation rate has been below the 2% mark again. In this respect, it is questionable how long the SNB will stick to its policy of a very strong franc. As a result, the euro could gain at least slightly against the franc next year.
EUR/CHF: Strong franc dampens inflation
The Swiss National Bank has been pursuing a strong franc policy for months. The strong currency dampens the inflation rate
Exchange rate forecasts
Berenberg and consensus forecast in comparison, values at mid-year 2024 and year-end 2024
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