EUR LIKELY TO APPRECIATE SOMEWHAT AGAINST THE USD WITH A VIEW TO THE END OF THE YEAR – COMMERZBANK
EUR/USD is approaching 1.06. Economists at Commerzbank analyze the pair’s outlook.
Interest rate cuts could become concretely apparent in the US
In the medium term, we expect the Fed to lower its key rate again next year as the US economy cools. At the same time, the ECB is likely to keep interest rates on hold despite declining inflation and increasing headwinds for the Eurozone economy. This means that the ECB is taking a much more hawkish stance than the Fed, which should benefit the Euro. However, it is unclear when exactly the FX market will react to the divergence in monetary policy. As a result, the EUR is likely to appreciate less gradually than our forecast suggests.
In the long run, however, EUR strength is unlikely to be sustainable. According to our economists, the ECB is likely to succeed in controlling inflation to a lesser extent than the Fed in the long term. Regardless of which of the two central banks offers the highest real interest rate on its respective currency, this is likely to result in the Euro suffering from an increased inflation risk premium
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