Synopsis:

CIBC has revised its EUR/USD forecast higher, citing structural reform and fiscal expansion in Germany, a narrowing of US-EU growth differentials, and reduced capital outflows from the Eurozone. They now see the pair rising to 1.12 by year-end.

Key Points:

• CIBC expects EUR/USD at 1.10 in Q2, 1.11 in Q3, and 1.12 in Q4 2025

• German political agreement on infrastructure spending supports a reassessment of EU growth prospects, although it will not materially alter near-term ECB policy.

• ECB terminal rate forecast remains at 2.00%, but increased issuance steepens the German yield curve.

• Eurozone defence spending is expected to be funded via reallocated social cohesion loans, aiding peripheral bond spreads.

• Structural reforms and fiscal spillover effects are seen narrowing US-EU growth differentials.

• The Eurozone’s persistent current account surplus (~2.5% of GDP) and increased domestic bond issuance are expected to reduce appetite for USD assets.

Conclusion:

CIBC believes the structural backdrop for the euro is improving due to fiscal reform, relative growth rebalancing, and contained capital flows within the Eurozone. This supports a gradual move higher in EUR/USD, with a target of 1.12 by the end of 2025.