Synopsis:

RBC forecasts that EUR/USD could potentially hit 1.20 by 2025 if a US recession occurs. This outlook diverges from the consensus view that a US recession would strengthen the USD. RBC highlights unique factors, including European investors' substantial US equity holdings and potential risks from a Trump presidency.

Key Points:

• US Recession Upside Risk: RBC sees significant upside for EUR/USD in a US recession scenario, contrary to the typical USD-strengthening expectation.
• Hedging Dynamics: They attribute this view to hedging dynamics and large US equity holdings by European investors, which might make EUR a more appealing asset in such a scenario.
• Downside Risks: The primary risk to this forecast is a potential Trump victory, which could lead to more aggressive tariffs. However, the likelihood of this outcome has decreased since Biden’s withdrawal in July.

Conclusion:

RBC's long-term forecast for EUR/USD includes a potential rise to 1.20 by 2025 if the US experiences a recession, driven by unique hedging dynamics and European investment patterns. The main downside risk remains a possible Trump presidency, though this scenario seems less likely than before. The current long-term forecasts are maintained, with adjustments possible based on future political developments.