The American currency is ending the week in an unstable state, demonstrating pessimism. For several days, the greenback has been giving way to the euro, and now this trend continues. Experts fear that the USD will become stuck in a downward spiral and lose the ability to outpace the euro in the short term.
Many analysts agree that the American currency has faced tough times that will last for an indefinite period. According to Luka Manucchi, the leading currency strategist of MPS Capital Services Banca per le Imprese, whose forecasts are highly accurate, in the second half of 2023, the USD will fall by 5% against other currencies. The analyst added that a recession is expected in the US by the end of the current year and that the tightening of monetary policy by the Federal Reserve would stop the growth of the economy.
L. Manucchi's forecast implies a high probability of a recession in the United States. Ab aggressive fight of the Federal Reserve against inflation and possible negative consequences for the banking sector are aggravating the situation. In addition, the analyst points to the increased risk of a decline in the US economy.
Weak macroeconomic data from the US is the key reason for the pessimistic outlook for the US dollar and the economic situation. Against this backdrop, L. Manucchi believes that in the near future, the Fed will raise the key rate by 25 basis points once, while the ECB may choose two more rate hikes of 25 basis points each. According to preliminary forecasts, the double rate hike in May and June (by 25 basis points) will push the monetary policy towards restrictions. As a result, the gap between the monetary strategies of the ECB and the Fed will narrow, thus supporting the EUR/USD pair.
However, the implementation of such a scenario will weaken the greenback, which may lose 3% against the euro. At the moment, the US dollar is struggling with depression, trying to get out of the downward spiral. So far, its efforts have not been successful but it attempts to grow. On Friday, April 7, the EUR/USD pair was trading near 1.0918, demonstrating the confidence of the euro, which gained an advantage.
The day before, on Thursday, April 6, the European currency rapidly gained momentum after the publication of economic reports from Germany and the US. According to current data, in February, industrial production in Germany (taking into account seasonal fluctuations) increased by 2% on monthly basis. It should be noted that in January, this indicator increased by 3.7%, while analysts had expected its growth of just 0.1%. Analysts suppose that the improvement in Germany's macroeconomic data indicates that the largest economy in the eurozone will avoid a recession.
As for the US statistical data, it turned out to be contradictory. According to the US Labor Department, for the week ending April 1, the number of initial jobless claims decreased by 18 thousand. At the same time, the previous week's figure was revised upwards: the number of initial claims was 246 thousand instead of 198 thousand as previously reported. Along with other economic indicators, this suggests a slowdown in US economic growth. Against this backdrop, the new target for the EUR/USD pair is the 1.1000 mark, which is still unreachable. However, it is a matter of time, experts are confident. Earlier, the pair almost approached this level but then fell again and tested the 1.0900 mark. Now, the efforts of the EUR/USD pair are aimed at consolidating at the current level. Notably, European statistics showed better results compared to American ones. That is why the ECB has good reasons for a further hike in interest rates, unlike the Fed.
The eurozone economy turned out to be more resilient than expected, while the US economy disappointed the markets a bit. Analysts are also focused on a noticeable weakening of the US labor market. Under the existing conditions, the US dollar index remains under pressure. According to the current data, the weekly jobless claims showed a considerable rise up to 228 thousand against the anticipated 200 thousand. Earlier, it became known about a significant reduction of vacancies in the USA (by 630 thousand). As a result, the disappointing employment figures strengthened fears of a recession in the USA.
Credit Suisse economists think that next week the non-farm payrolls report will be the decisive factor for the EUR/USD pair. According to estimates, strong NFP data will push the Fed to abandon its dovish rhetoric. It will provoke a new round of the dollar's strengthening. Nonetheless, the Credit Suisse experts are cautious in their forecasts and stick to the current strategy, which implies the greenback weakening against the euro.
The coming NFP report will give more detailed information on employment and wages. The analysis of these aspects will help investors to decide whether to wait for a new rate hike from the Fed or a pause. Next week, markets will focus on data on the US consumer price index (US CPI) that is due on Wednesday, April 12. Against this background, experts do not rule out the possibility that the Fed will slow down the key rate hike. If the predictions come true, the US dollar may slide.
