Euro: Will Fed and ECB convergence support gradual gains? – Commerzbank

EUR/USD is forecast to edge up from 1.12 to 1.18 by end‑2027 as support for the Dollar weakens, according to Commerzbank economists led by Dr. Jörg Krämer and colleagues. They anticipate that the Fed and ECB will leave rates unchanged in October before raising them by 25 bps in December. Policy is then expected to remain slightly restrictive as inflation eases into 2027.

Can the Euro Extend Gains as the Dollar Weakens?

"The EUR/USD exchange rate is likely to continue drifting higher in the coming quarters because the dollar is suffering as a result of Trump curtailing the Fed’s independence and taking aggressive action against many countries, prompting them to seek alternatives to the dollar."

"The Fed and the ECB thus have good reasons to pause in October, not least to gain more clarity on the economic and geopolitical conditions. In December, however, both central banks are likely to respond to persistently high inflation and raise interest rates—as priced in by the futures markets—by 25 basis points. However, the forecast for the ECB is contingent on the situation in the French government bond market not escalating."

"Due to the expected decline in oil prices, our forecast indicates that the ECB’s and the Fed’s inflation targets should come within reach again toward the end of 2027. In the U.S., core inflation is also expected to decline steadily. In the eurozone, this will likely not be the case until mid-2027, but the significant decline in headline inflation should convince the ECB that this is merely a temporary phenomenon that does not warrant further interest rate hikes."

"We continue to assume that, due to these constraints, the central banks will pursue a monetary policy that is on the loose side. The decline in inflation next year could therefore be only a temporary phenomenon."

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