Danske Research discusses the USD outlook, highlighting its scenarios for EUR/USD over the coming weeks.
"For whatever reasons, calling for rising rates have been a losers game over the past decade(s). But did central banks just give the signal for a repricing, as of last week? Starting the year, nobody – and not least Fed – was willing to even discuss the possibility of tightening. But what a year. Now, Fed has all but fully pre-committed to start tapering this year, ending purchases mid-2022," Danske notes.
"A stronger dollar and raising (real) rates are another. Central banks should view the re-anchoring of long-term inflation expectations around 2% as a success. But now, the objective is shifting to not let high (and rising?) expectations to near-term inflation let the l/t expectations de-anchor. A stronger dollar, rising real rates and the cyclical slowdown may be enough to contain inflation pressures but if not, there is a global recession at the end of this road. Back to the 80’s ?
Our base case remains that EUR/USD will weaken to 1.13 over the coming year but the pace and potential undershooting of this will depend on how willing CBs are to lean against CPI. At the moment, the risk seems to the downside for spot," Danske adds.