FX Weekly – New EUR/USD forecast

by: Georgette Boele , Roy Teo

FX-Weekly - 1-September-2014 - New EUR/USD forecast.pdf ()
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Monetary policy differentials point to an even lower EUR/USD

We have adjusted our forecasts for German yields (see our Macro weekly) to reflect the view that German yields will likely remain low for the foreseeable future. We expect the spread between US and German 10y yields to widen further. This will put downward pressure on EUR/USD in our view. In addition, more monetary stimulus and the negative deposit rate will hurt the euro. Finally, we expect the Fed to gradually turn more hawkish in the coming months. This will reflect a trend of stronger than expected US data releases. The change in Fed communication will result in a rise in interest rate expectations for 2015 in our view. This should provide a boost to the US dollar across the board. We have lowered our forecast for EUR/USD to 1.30 for the end of September (from 1.35) and to 1.28 for the end of December 2014 (from 1.30).