The earlier-than-expected Fed tightening cycle suggests our prior end-2021 EUR/USD forecast of 1.28 was just too high. Yet November and December are seasonally weak months for the dollar and assuming that the Eurozone recovery goes to plan, EUR/USD should still rally to the 1.23 area. 2Q22 is when the dollar should be rallying more broadly – coinciding with some decisive flattening in the US yield curve.
1.17-1.23 may well be the rough trading range for EUR/USD for the next six months – after all Fed tapering does not necessarily mean lift-off in the dollar. This consolidative environment can allow local stories to play out. Despite the recent (exaggerated in our minds) correction, commodity currencies should still do well. Norway may hike twice this year, and Canada and New Zealand may not be far behind. We could see all of these retesting their cycle highs against the dollar later this year.
Time to revise the EUR/USD forecast
*This month we are revising our EUR/USD profile to adjust for a Fed seemingly ready to hike rates in late 2022. That is much earlier
than the 2024 initially envisaged under its new targeting framework. That window for our forecast EUR/USD move as high as 1.28 looks to be closed on a more hawkish Fed.
*Yet the big, broad turn higher in the dollar should really start in 2Q22 – six months before the Fed starts tightening. Before then, EUR/USD should be able to trace out a 1.17-1.23 range.
*We still think 1.23 is possible because of strong growth momentum into 2H21 and an ECB that may too have to reconsider its ultra-dovish settings when it meets in September.