Pfister at Commerzbank outlines three scenarios for higher EUR/USD in coming weeks. The pair has retreated towards 1.16 as markets cut European Central Bank (ECB) hike expectations from four moves to about 70 bps. Upside could come from a more hawkish ECB, a repricing of Fed hikes if data disappoints, or an end to the war and lower Oil prices supporting the Euro.

ECB stance and Fed repricing key

"Fortunately, a large number of G10 central bank meetings are scheduled for the coming weeks, with the ECB likely to be the highlight next week. The market has steadily scaled back its expectations of the ECB over the last couple of weeks. Instead of four interest rate hikes this year, the market is now anticipating 'only' a 70-basis-point increase in the deposit rate."

"Market participants betting on higher EUR/USD levels in the short term have three options:"

"For the euro to recover, the ECB would need to sound significantly more hawkish next week. But this would be very challenging given expectations of just under three rate hikes this year. A first rate hike next week seems all but certain, and ECB President Lagarde may at least hint at the second rate hike during the press conference."

"While expectations for the ECB have been revised downwards towards fewer rate hikes, expectations for the Fed have moved in the opposite direction. For the Fed to actually hike rates, the macroeconomic data would need to make this necessary."

"An end to the war, coupled with both sides sustaining the opening of the Strait of Hormuz, would point to higher EUR/USD levels."

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