EUR/USD: Gradual appreciation of the Euro towards the end of the year – Commerzbank EURUSD ECB Fed Banks
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 more hawkish stance than the Fed, which should benefit the Euro. However, the exact timing of the currency market's reaction to the monetary policy divergence described above is difficult to predict.
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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