Written by Saroopia Ganguly
BANGALORE (Reuters) – The euro is expected to weaken modestly against the U.S. dollar this month before rallying by the end of the year, currency strategists polled by Reuters said, even though financial markets expect two more interest rate cuts by the European Central Bank by then.
After underperforming analysts’ expectations in Reuters polls over the past year, the euro has fallen more than 1% since French President Emmanuel Macron called a surprise early election for June 9.
The party made only slight gains after Marine Le Pen’s National Rally party won a smaller share of the vote than some polls had initially predicted, despite emerging strongly in the lead after the first round of the election on June 30.
However, the euro, which has fallen more than 2.5% against the dollar so far this year, will show resilience amid heightened political uncertainty in the European Union’s second-largest member, according to currency strategists in a Reuters poll from June 28 to July 3.
The average forecast for how low it could fall this month was $1.06, about 1.5% lower than its trading level on Wednesday.
“If there wasn’t the French election dynamics in the background, we would expect the euro to be much higher than it is right now,” said Dan Tobon, head of G10 FX strategy at Citigroup.
“But based on polls and market expectations, we don’t really see much of a downside,” Tobon added.
The survey also showed the euro would strengthen over the next three months and by the end of the year, although a separate poll showed the European Central Bank is expected to cut interest rates twice more this year – in September and December – after cutting them in June.
The average forecast from about 80 foreign exchange strategists was for the euro to rise about 1.5% to $1.09 by the end of this year and to trade at $1.10 by the end of the first half of 2025.
In January, the euro was expected to rise 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 expectations of a rate cut by the Federal Reserve, which has strengthened the dollar.
Economists in a separate Reuters poll expected two U.S. rate cuts this year, but cited one or no rate cuts as a major risk, which could put the euro under pressure.
“Markets may be overpricing rate cuts from the Fed and, in the near term, rate cuts elsewhere as well,” said Eric Nelson, macro strategist at Wells Fargo Securities. “There is certainly a risk that we see more dollar strength than we currently expect.”
The dollar has gained more than 4% against a basket of major currencies since January, defying expectations of weakness that prevailed at the start of the year.
The Japanese yen, which has fallen about 13 percent over the year to a 38-year low of 161.97 yen per dollar on Wednesday, will be the biggest gainer among major currencies by the end of the year, rising 6.5 percent to 152 yen, according to the poll.
So far, Tokyo has relied primarily on market interventions to support the yen, but when asked what authorities could do to halt its decline over the next three months, most analysts said the Bank of Japan would need to raise interest rates aggressively.
“The longer they wait to get on the ground, the more they will have to step up their intervention,” said Roberto Mialic, currency strategist at UniCredit.
(For more information on the Reuters Foreign Exchange Survey for July, click here.)