Euro: Fed repricing supports moderate gains against US Dollar – Commerzbank

Commerzbank analyst Thu Lan Nguyen suggests that the US Dollar's (USD) current strength due to perceived hawkish Federal Reserve (Fed) policy may diminish as markets reconsider United States (US) rate expectations in upcoming quarters. While the Euro (EUR) faces limitations from energy-related growth and rate headwinds, EUR/USD is projected to climb towards 1.19 by the end of 2027 as US rate expectations soften.

The US dollar has been bolstered by a Federal Reserve that markets continue to view as relatively hawkish. However, this perception has begun to weaken since the July FOMC meeting. Despite this, markets still anticipate further US rate hikes. The analysts believe these expectations are overly optimistic and anticipate a reassessment of the rate outlook over the coming quarters, which should negatively impact the dollar.

Although the Euro's (EUR) rate expectations also seem somewhat inflated, the euro is likely to gain more from the resolution of the US-Iran conflict. If, as expected, tensions between the US and Iran ease by year-end, inflationary pressures will likely decrease significantly in the following year. In such a scenario, the Fed may once again shift its focus towards supporting growth, potentially even restarting its rate-cutting cycle.

Consequently, the analysts expect US rate expectations to be revised significantly lower in the forthcoming quarters, a move that should ultimately weaken the dollar. Nonetheless, the depreciation is not expected to be as severe as initially anticipated, as the possibility of the Fed raising rates in the coming months has increased.

The EUR/USD rate is now forecasted at 1.19 by the end of next year, a slight improvement from the previous estimate of 1.21.