EUR/USD: Overall fundamental backdrop continues to support a gradual recovery – Citi

Economists at Citi expect the EUR/USD pair to move gradually higher over the coming months.

EUR/USD influenced as much by the pace of ECB balance sheet contraction as rate differentials

Market pricing supports a significant narrowing of rate differentials in favor of EUR versus USD from 2024 onward.

A faster pace of ECB balance sheet contraction versus the Fed balance sheet implies less EUR supply relative to demand and may also favor EUR vs USD over the medium term. 

EUR/USD’s gradual but firmer trend is also supported by the improvement in Euro area’s terms of trade, recovering from the energy shock emanating from the Russia – Ukraine war.

For the recovery to accelerate, this would likely require a strengthening Chinese economy, given Euro area’s close links to China via the export channel.