Interest rate differentials and expectations remain primary drivers of EUR/USD. Therefore, the pair could extend its downtrend in the near-term but the medium-term outlook appears to be supportive for the euro, economists at ANZ Bank report.

Rate differentials are key

“The fact that the Fed has signalled its intent to return interest rates to neutral quickly while the ECB has not embraced that debate yet, is also supporting the USD. In the near-term, therefore, USD strength can run further. However, we are not convinced that the medium-term outlook is of persistent USD gains.”

“Firstly, we expect the ECB to turn more hawkish. Secondly, we believe the ECB is determined to prevent fragmentation. Thirdly, the EA policy mix is turning positive for the EUR as fiscal policy expands. Expansionary fiscal and tighter monetary policy provide a supportive backdrop to the euro area whose terms of trade will also recover over the medium-term.”