ABN AMRO’s research examines how evolving Federal Reserve policy and Eurozone fundamentals may shape EUR/USD over the coming quarters. The authors describe a gradual convergence in growth and inflation between the US and Euro area and argue this should support a higher EUR/USD level over time, while highlighting risks from divergent central bank paths and global risk sentiment.

Euro Dollar pair and convergence

"We expect EUR/USD to trend higher over the coming year as interest rate differentials narrow and markets price out some of the exceptionalism that has supported the Dollar in recent quarters."

"In our view, a gradual normalisation of US growth relative to the Eurozone, combined with a Fed that is closer to the end of its tightening cycle than the ECB, should provide a constructive backdrop for the Euro."

"If the Fed is forced to maintain a more restrictive stance for longer, while the ECB proceeds with its own easing plans, the upside for EUR/USD could be more limited than in our baseline."

"Our central forecast is for EUR/USD to move towards levels that are more consistent with medium-term fundamentals, but we acknowledge that short-term volatility driven by data surprises and shifts in risk sentiment could be significant."

"Downside risks to our EUR/USD view include a renewed deterioration in Eurozone growth prospects, a resurgence of fragmentation concerns, or a scenario in which US growth remains persistently stronger than we currently project."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)