US Economic Data Disappoints: Analysts Revise EUR/USD Projections Amid Shifting Sentiment

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The United States released some new economic data last week, and it wasn’t great news. The numbers showed the US economy is slowing down more than many experts expected. Because of this disappointing data, analysts who study and predict currency prices are revising their forecasts for the exchange rate between the US dollar and the euro.

What Data Disappointed?

There were a few key reports that came out worse than hoped. First, the monthly jobs report showed fewer new jobs were created in April than in recent months. Only 135,000 new jobs were added, quite a bit below what analysts were predicting of around 185,000.

While the unemployment rate stayed very low at 3.6%, the slower job growth raised concerns that the strong labor market may be starting to cool off after over a year of robust hiring. A tight labor market puts upward pressure on wages as companies compete for workers, which can then feed into broader inflation if those higher labor costs get passed along to consumers.

Other data also pointed to an economy losing steam. Retail sales for April came in flat compared to March, missing expectations for a moderate increase. This suggests consumer spending, which drives about 70% of overall economic activity, is being restrained by still-high inflation and rising interest rates.

Perhaps most crucially, measures of inflation showed prices continued rising rapidly in April despite the Federal Reserve’s aggressive interest rate hikes aimed at slowing price growth. Consumer prices climbed 4.9% from a year ago, higher than forecast. Prices for services accelerated, offsetting some deceleration in goods inflation.

Why Does Disappointing US Data Matter for EUR/USD?

So why do these weak US economic reports matter for the exchange rate between the euro and the US dollar? There are a few key reasons to keep in mind the EUR USD trend prediction:

  1. If US growth slows more than anticipated, that could relieve some upward pressure on the US dollar by easing expectations for how much higher the Federal Reserve will need to raise interest rates to fight inflation. Higher interest rates tend to attract more global investment flows into an economy and its currency.
  2. Relatively stronger economic performance in Europe compared to the US could cause the euro to appreciate versus a weakening US dollar. Investors tend to prefer currencies with higher interest rates and better economic prospects.
  3. Signs of stubbornly high US inflation, even as growth cools, raise fears that the Fed may need to take an even more aggressive policy stance to wrestle price rises under control. This could increase recession risks, another bearish factor for the US dollar.

How Are Analysts Adjusting EUR/USD Forecasts?

In the wake of the disappointing US data releases, many forex analysts are adjusting their projections for the EUR/USD exchange rate over the coming months:

Bank of America now forecasts the euro to rise to parity with the US dollar by year-end 2023, up from its previous call for the EUR/USD to hold around 0.98. The bank’s currency strategists cite the relative resilience of the eurozone economy and potential movement in eurozone-US yield spreads in favor of the euro.

JP Morgan pushed back its expectation for EUR/USD reaching parity to mid-2024 from year-end 2023 previously. However, the bank still sees the shared currency eventually recouping all of its losses versus the greenback after plunging to 20-year lows last year.

Analysts at HSBC revised higher their EUR/USD targets for this year and next. They now project the pair finishing 2023 at 1.10 and 2024 at 1.15, up from previous forecasts of 1.05 and 1.10, respectively. HSBC analysts point to the eurozone’s relatively hawkish ECB policy stance and lower recession risk compared to the US.

Goldman Sachs pushed out its expectation for EUR/USD parity to occur to the first quarter of 2024 from the fourth quarter of 2023 based on the weaker US economic trajectory. However, the bank also expects the Fed to ultimately take rates higher than markets are pricing in, limiting euro gains later next year.

Morgan Stanley recommends staying moderately overweight the euro versus the US dollar. The bank’s strategists believe the growth differential between the eurozone and the US appears to be shifting in favor of the single currency bloc. They forecast EUR/USD rising to 1.13 in quarter 4 of 2023.

Not Everyone is Bearish on the US Dollar

To be sure, not all analysts have grown more bearish on the US dollar’s prospects in light of the recent data. Those at UBS still expect EUR/USD to end this year around 0.98 before declining to 0.95 by mid-2024 as the Fed keeps rates higher for longer.

Currency analysts at Citi similarly maintained a bearish US dollar view, projecting the EUR/USD to only recover to parity by the end of 2023. Any upside for the shared currency remains capped by eurozone growth concerns.

Ultimately, while analysts hold a range of updated views on the EUR/USD rate, the disappointing US economic releases do appear to have shifted sentiment to a more euro-friendly trajectory over the medium term. Markets are now pricing in a higher probability of the Fed slowing or pausing rate hikes later this year, whereas the ECB is still expected to keep tightening policy well into 2024.

Of course, any outlook remains data-dependent and subject to further revision. Investors will closely watch upcoming US data prints, particularly on inflation, consumption, and labor market conditions. Signs of economic overheating could quickly realign rate hike expectations and rekindle US dollar strength.

Conclusion

The new US economic data was worse than expected. This surprised many people. No one can predict exactly how currencies will move months from now. But most analysts now think the euro will rise against the US dollar for the rest of 2023 and into 2024. Before the data, they did not expect the euro to rise as much.

However, this forecast depends a lot on future economic data. If US growth and inflation numbers improve a lot in the coming months, analysts may change their views again on the US dollar. For now, the disappointing US data seems to have helped the euro. The euro had been falling against the strong US dollar for most of the past year. But the new data gave the euro a boost.