Synopsis:

Despite recent EUR underperformance driven by US election outcomes, ANZ sees potential for a recovery in EUR/USD, forecasting 1.10 by year-end. However, political and economic challenges in the EU, coupled with proposed US tariffs, remain key risks.

Key Points:

• US Tariffs and EU Economic Weakness:

  • Proposed tariffs by the incoming US administration pose a risk to the EU’s fragile GDP recovery.
  • November PMIs are likely to highlight continued softness in EU growth, adding pressure to EUR/USD.

• Political Uncertainty in Germany:

  • Turbulence in German politics, especially the potential for a hung parliament in mid-March elections, could weigh on the EUR.
  • Similar to post-French election dynamics, EU political uncertainty remains a headwind for the EUR.

• Limited Downside Risks for EUR/USD:

  • While the backdrop for the EUR appears challenging, ANZ believes the DXY will not surpass 107, limiting EUR/USD downside.
  • Market expectations for ECB rate cuts exceeding 140bps into mid-2025 may be overly aggressive. A shallower easing cycle could provide support to the EUR.

• Year-End Target for EUR/USD:

  • ANZ maintains its year-end forecast of 1.10 for EUR/USD, driven by an anticipated stabilization in market sentiment and limited further USD strength.

Conclusion:

Although EUR/USD faces significant near-term challenges, including US tariff risks and German political uncertainty, ANZ sees room for a recovery toward 1.10 by year-end, supported by less aggressive ECB rate cuts and a capped USD rally.