Danske Bank maintains its strategic outlook for a lower EUR/USD based on relative terms of trade, real rates, and relative unit labor costs. They expect three more 25bp rate hikes from the ECB in June, July, and September, bringing the policy rate up to 4%.

According to Danske, the Fed has likely delivered its last rate hike for this cycle, but they believe the market's expectation of three 25bp rate cuts for the rest of the year seems too aggressive. If this view is correct, it could provide some USD support in H2.

Fundamentally, the US should continue to be a high(er) interest rate market and equities continue to attract foreign investors. The bank views 1-3Y fair value for EUR/USD to be in the mid-to-low 0.90’s, making valuation a headwind and thus acting as a source of gravity for a lower spot.

Two factors that could alter EUR/USD valuation are the global energy crisis and euro area fiscal policy. If the energy crisis eases and/or euro area countries return to a regime centered on fiscal rules, there is room to place a higher fair value estimate on EUR/USD.

However, substantial weakness in the US economy and the continuation of the relative asset demand of euro area assets pose risks to this forecast. Despite these, Danske believes a strong USD is necessary for global inflation to continue down, and tighter USD liquidity conditions could add EUR/USD downside