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Danske Bank lowers its forecast profile for the Euro to Dollar exchange rate, saying the U.S. Dollar is yet to hit new highs and the Eurozone's trade shock is likely to persist.

In a new foreign exchange research briefing, analysts at one of Scandinavia's biggest lenders, say the Eurozone is expected to see an extended terms-of-trade shock, which will undermine its currency.

"We lower our forecast profile for EUR/USD and expect the cross at 0.93 in 12M on the back of a substantial negative terms-of-trade shock to Europe vs U.S.," says Jens Nærvig Pedersen, Chief Analyst at Danske Bank.

The Eurozone has seen its trade surplus, driven by Germany's export engine, completely reverse into a deficit in 2022.

This is as imported gas and oil prices surged, raising the cost of imports, and dealing a blow to a region that is a net importer of energy.

The global slowdown and higher costs of production have meanwhile provided a negative shock to German industrial export earnings, creating a fundamentally negative trade balance for the Euro.

China is a significant destination for Germany's high-value goods, but an ongoing slowdown in the world's second-largest economy has hit export earnings hard.

Indeed, so significant is China's slowdown it appears officials are unwilling to release their latest GDP data.

Furthermore, Danske Bank's economists warn the Eurozone's growth risks are firmly tilted to the downside.

Regarding the Dollar, more strength is to be expected.

"A key assumption behind our FX forecasts is that of a stronger USD and tightening of global financial conditions," says Pedersen.

The global economy is expected to continue slowing as central banks raise interest rates and consumers retreat in the face of rising inflation.

Above: EUR/USD forecast profile. If you are looking to secure your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

This cyclical downturn traditionally favours the Dollar, and Danske Bank says this time is no different.

Crucially, the downturn has further extended, offering support to the U.S. currency.

The march to higher central bank interest rates is being led by the Federal Reserve, which continues to battle sticky and elevated inflation, in turn creating an interest rate advantage for the Dollar.

"Fundamentally, the U.S. should continue to be a high(er) interest rate market and equities continue to appeal to foreign investors. This means the U.S. is likely to attract capital, which generally helps the USD," says Pedersen.

Danske Bank forecasts the Euro-Dollar exchange rate at 0.97 in one month, 0.96 in three months, 0.95 in six months and 0.93 in twelve months.

A key risk to this view, which could see Euro-Dollar recover to 1.15, is global inflation pressures fading and industrial production increasing.

"The upside risk also includes a renewed focus on easing Chinese credit policy and a global capex uptick but neither appear to be materialising, at present," says Pedersen.