EUR/USD: Weakness in the euro likely to persist

According to analysts at Wells Fargo, the EUR/USD pair could drop to 0.91 by the first quarter of next year. They point out that the European Central Bank will lag well behind the Federal Reserve and also consider that economic conditions in the Eurozone are worsening.

Key Quotes:

“The fact that some key foreign central banks are set to lag the Fed in terms of the pace of rate hikes, as well as fall short of the tightening currently priced into financial markets, should also weigh on foreign currencies and support the U.S. dollar for the time being. In fact, we have revised our forecast lower for the EUR/USD exchange rate to $0.9100 by end Q1-2023 and lowered our forecast for the GBP/USD exchange rate to $1.0200 over the same period. More broadly, we see the Fed's U.S. dollar index against the advanced foreign economies gaining around a further 5% over the next six months. That would lift this particular trade-weighted dollar index to new 22-year highs.”

“We now forecast a slightly deeper recession for the Eurozone region than previously. Elevated inflation, reduced consumer purchasing power, energy supply disruptions and central bank tightening are all factors that we see contributing to Eurozone contraction. Confidence surveys are also now more clearly pointing to a Eurozone slowdown. We now expect the Eurozone economy to contract a cumulative 1.25% between late 2022 and mid-2023.”

“We expect weakness in the euro to persist. High and rising inflation should continue to weigh on the consumer, and energy supply disruptions could more directly impact manufacturing activity. Confidence surveys are now clearly pointing to contraction, especially for Germany—the region's largest economy. While the European Central Bank should raise rates further, underwhelming Eurozone growth should see it lag well behind the Fed, another factor that could see the EUR/USD exchange rate reach $0.9100 by Q1-2023.”

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