Euro: Gradual upside as Fed and ECB converge – Commerzbank
Commerzbank economists, led by Dr. Jörg Krämer and colleagues, expect the Fed and ECB to keep rates unchanged in October but deliver 25 bps hikes in December, with policy then staying slightly restrictive as inflation trends lower into 2027.
Commerzbank economists anticipate the Federal Reserve and European Central Bank to maintain interest rates at current levels in October, with both institutions poised to increase rates by 25 basis points in December. As inflation trends lower, the forecast suggests EUR/USD will climb from 1.12 to 1.18 by the end of 2027 as the dollar loses support.
The euro's appreciation is attributed to the dollar's decline due to Trump's actions aimed at weakening the Fed's independence and targeting multiple nations, prompting a search for dollar alternatives.
Both central banks are likely to pause rate hikes in October to gather more economic and geopolitical clarity, but will likely raise rates in December due to persistent high inflation. The ECB's forecast hinges on the French government bond market's stability. With a projected decline in oil prices, both central banks' inflation targets should align by year-end.
In the U.S., core inflation is expected to decrease steadily, while the ECB may not see the same effect until mid-2027, though the significant drop in headline inflation should convince them that this is a temporary situation.
The central banks are projected to pursue a loose monetary policy, which may make inflation only a temporary issue. This could benefit the euro, as the decline in inflation next year might be only temporary.
Written by urgent.news from FXStreet's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
