In contrast with market expectations of 20 bps of cuts for the fed funds rates by year-end, there are no cuts priced in for the ECB until early 2024. This suggests that the ECB’s easing cycle will be later and shallower than the US Fed’s, which is supportive of the EUR over the medium term.

A relatively more hawkish ECB, with more work to do in taming inflation, could bring about some upside in the EUR vs the USD in H2 2023. However, given that economic data surprises in the Euro-area are turning negative relative to the US, we believe that any upside in the EUR will be capped at 1.12 in Q3. We also think that any rally in the EUR will likely be driven by USD-related factors. 

We expect EUR/USD to remain in a 1.05-1.14 range in 2023.