National Bank Canada's (NBC) Stéfane Marion and Kyle Dahms observe that the Euro has softened alongside the broader USD rally, even as Eurozone inflation has reaccelerated and pushed the ECB toward a more hawkish stance. They see EUR/USD mainly as a Dollar story, targeting 1.19 by year-end from 1.16 currently, with upside constrained unless Eurozone growth and rate spreads move more decisively against the Dollar.

Euro outlook hinges on USD path

"The euro has softened with the broader USD rally, even as the Eurozone inflation backdrop has turned more challenging for the ECB. Headline inflation rose to 3.2% y/y in May, while core inflation moved to 2.5%, leaving both measures uncomfortably above target and pointing to a more persistent inflation problem than policymakers would like."

"We therefore see the euro’s path as mostly a USD story. Our year-end target is 1.19 for EUR/USD, compared with 1.16 currently. That is not a strong euro exceptionalism call."

"It is a view that the broad dollar should moderate as Fed repricing matures and the second-half depreciation trend resumes. The common currency can participate in that move, but the upside is likely to remain gradual unless growth improves more convincingly or short-term spreads turns more decisively against the dollar."

"For the euro, however, the issue remains relative policy. A more hawkish ECB can help limit euro downside, particularly if markets continue to price some risk of renewed tightening. But it is not enough on its own to generate a sustained rally if the Fed is also being repriced in a more hawkish direction."

"In that sense, the euro’s near-term resilience shoud remain, but the case for a move toward our 1.19 year-end target still depends heavily on the broader USD moderation we expect in the second half."

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