EUR/USD forecast: Euro hovers at lowest level in three months ahead of ECB interest rate decision

At the start of September, the Euro (EUR/USD) hovered around $1.07, marking its lowest level in three months, as traders grappled with analyzing the European Central Bank's (ECB) upcoming actions.

As of September 7, the euro to dollar currency pair was trading at $1.071, according to Marketwatch data, having exhibited growth of over 7% throughout the past year. Over the past month, however, EUR/USD has retreated by close to 2.5% on U.S. dollar strength.

Presently, investors are pricing in a roughly 64% chance that the ECB will maintain its interest rates at their current levels when it convenes for its monetary policy decision on September 14th, according to market sentiment cited by Reuters.

This cautious stance stems from ongoing concerns about a looming recession, particularly in Germany. Revised data shows that the Euro Area's GDP grew by a mere 0.1% in the first half of the year. German factory orders and industrial production experienced more substantial declines than anticipated, while PMIs for the largest economies in the bloc signaled contractions in the services sector.

On the flip side, the inflation rate remained steady at 5.3%, surpassing the central bank's target by more than double and amplifying concerns about stagflation — persistent high inflation combined with high unemployment and stagnant demand.

In recent days, ECB policymakers have conveyed mixed messages regarding their interest rate intentions, leading to uncertainty surrounding the central bank's future plans.

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EUR/USD forecasts: Analysts offer mixed opinions on upcoming ECB meeting, point to ‘vulnerable’ euro

In their FX Snapshot on September 4, analysts at Citibank Hong Kong said the European Central Bank was likely to hike rates next week:

“Citi analysts still expect an ECB hike in September to 4.00% and for rates to remain at this level potentially through to Q3 2024. Market pricing supports a significant narrowing of rate differentials in favor of EUR versus USD from 2024 onward. Overall, the trading range in EURUSD has been steadily shifting higher which augurs well for the pair later this year as the ECB keeps financial conditions tighter for longer than most, if not all other [advanced economy] central banks including the Fed.”

Citibank slightly lowered its EUR/USD forecast for the next three months to an average of $1.10 (previously $1.11) and adjusted its 6 to 12-month euro-to-dollar projection to $1.14 (previously $1.16). The bank’s long-term EUR/USD projection stands at $1.20.

FX analysts at Dutch bank ING recently published a preview of next week’s ECB meeting, forecasting a “final” rate hike in what they said was a “very close call.”

“It's a close call, but we think policymakers will deliver one last 25bp rate hike. As things stand now, markets disagree with this view, pricing in a mere 9bp for September and 15bp to the peak. This means that there will be room for a sizeable rebound in the euro if we are right about the ECB,” wrote ING analyst Franceso Pesole in the bank’s daily FX roundup on September 7.

“We had warned EUR/USD would likely be vulnerable into the ECB meeting, and we are indeed seeing more USD strength keeping the pair pressured. It would already be a positive sign for EUR/USD bulls to see the 1.0700 support hold for another session, possibly indicating that could be the bottom into next week’s risk events,” he added.

As of September 7, ING’s EUR/USD forecast stood at $1.15 for the final quarter of 2023, with the euro potentially strengthening into 2024, trading at an average of $1.18 in Q1 and Q2 2024 before retreating back to $1.15. It should be noted that a further update to the forecast is forthcoming.

In a FX update in late August, Danske Bank expected the ECB to hike in September. “In contrast to the Fed, we do not think that the ECB is done hiking. We think there is one 25bp rate hike left in September from the ECB, bringing the policy rate up to 4%,” wrote Danske associate Mohamad Al-Saraf.

The bank offered a bearish long-term EUR/USD forecast, highlighting the euro’s vulnerable position in relation to the U.S. dollar:

“We view 1-3Y fair value for EUR/USD to be in the mid-to-low 0.90’s. At current levels, valuation is a headwind and thus acts as source of gravity for a lower spot. The global energy crisis and euro area fiscal policy are two factors to monitor, which could alter EUR/USD valuation. If the energy crisis eases and/or euro area countries return to a regime centred on fiscal rules, there is room to place a higher fair value estimate on EUR/USD.”

Contrary to Citi, ING and Danske, Reuters market analyst Justin McQueen opined that the ECB’s decision to potentially hike rates next week would catch the markets by surprise, while EUR/USD would remain under pressure:

“[…] Even in the event of what would be a surprise rate hike – given current market pricing – EUR/USD would likely remain under pressure. While underlying inflation remains stubbornly high at 5.3%, recent PMI data has fallen to recessionary levels, raising stagflation concerns for the euro zone.

In turn, with economic activity deteriorating notably, an additional rate hike would only exacerbate these issues further and thus hiking into economic weakness is unlikely to be a positive for the single currency.”

McQueen’s technical analysis saw the EUR/USD currency pair testing the May low in the even of a pause by the ECB:

“For EUR/USD, the path of least resistance remains to the downside, particularly with the pair below its 200-DMA (1.0823). A pause next week would leave the May low at 1.0635 under threat and potentially opens the door to 1.05. A surprise hike would likely see traders fade the initial knee jerk move higher given that it is unlikely the ECB would hike again in this cycle.”

Analysts at Finland-based bank Nordea echoed McQueen’s sentiment, maintaining unchanged interest rates as their baseline scenario:

"The ECB leaves rates unchanged while retaining its tightening bias; we think such an outcome would put some downward pressure on interest rate expectations, even if it would be considered a hawkish hold. This is also our baseline scenario,” the analysts told FXStreet.

The ECB will announce its monetary policy decision next week on September 14th.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.