EUR/USD: Divergence between Fed and ECB to pummel the pair to 1.10 – Nordea

The relative outlook between the Federal Reserve and the European Central Bank (ECB) will likely widen policy-wise over the coming year, leaving the EUR vulnerable versus the USD. Economists at Nordea increase their conviction in a stronger USD and target levels around 1.10 in EUR/USD.

See – EUR/USD: Path clear for pullback to the 1.16 level – SocGen

Fed to deliver four hikes before the end of 2023, while the ECB is on hold

“We target levels around 1.10 in EUR/USD over the forecast horizon and expect the bulk of the move to happen sooner rather than later in conjunction with the launch of the tapering process.”

“Would the Fed be annoyed with a lower EUR/USD reading? Not really, as they would then be able to partly export the current overshooting (supply side) inflation.”

“Would the ECB be annoyed with a lower EUR/USD reading? Not at all since a lower reading would be helpful in bringing EUR inflation to 2% or above as wished for. This leaves a decent scope for a move lower in EUR/USD, also as positioning is not yet USD heavy.”

“The relative inflation outlook also heavily favours the USD versus the EUR, likely as it hints of a growing policy divergence between the Fed and the ECB. [...] We expect the first hike from the Fed in September 2022, followed by another three hikes in 2023.”

“We continue to think that the ECB will stick with the current EUR1850 B envelope, which still has more than EUR500 B of firepower left; enough to taper the purchases only during the first half of 2022. Looking beyond PEPP, we expect the central bank to boost its current EUR20 B a month Asset Purchase Programme when the PEPP ends. Against the modest Euro-area inflation outlook, we do not see any ECB rate hikes even in our extended forecast horizon until the end of 2023.”