Image © European Central Bank

According to a year-ahead outlook briefing from one of Scandinavia's biggest banks, the Euro to Dollar exchange rate can rise to 1.11 before a multi-month decline sets in.

The call chimes with the reality that global financial markets are locked in a period of improved sentiment that tends to benefit the Euro and Dollar, thanks to growing confidence that global inflation will fall further and allow central banks to lower interest rates over the coming months.

"Look to buy on dips in the near-term," says Stefan Mellin, Chief Analyst for FX Strategy at Danske Bank. "In the near term, we still see good opportunities for USD weakness on the back of the considerable easing of financial conditions over the past month, in conjunction with bearish USD year-end seasonality."

Danske Bank's latest forecast pack shows analysts looking for the Euro-Dollar exchange rate to reach 1.11 on a one-month horizon.

But, "looking further ahead, it looks like European investors will still have to pay to hedge their USD FX exposure next year, although the cost has fallen and may fall further next year on the Fed cutting policy rates first," says Mellin.

"Whether carry stays around current level or falls next year, we think there are good arguments for why EUR/USD should still drop, including relative productivity, energy terms of trade and fiscal sustainability to name the most prominent. Hence, any rise in EUR/USD in the coming month could open up for some very attractive short-entries," he adds.

Danske Bank expects Euro-Dollar to trade at lower levels on a 6-12M horizon based on relative terms of trade, real rates (growth prospects), and relative unit labour costs.

Danske Bank is strategically bearish EUR/USD and looks for the pair to fall to 1.10 in three months, 1.07 in six months and 1.05 in twelve months.

This pits them against a consensus that looks for a steady decline in the dollar during 2024, allowing for firming Euro-dollar conversion rates.

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