Rate spreads and the energy income shock make it a very tough environment for the euro. EUR/USD should therefore drift near parity for much of the second half of the year, strategists at ING report.

Late cycle economies will keep the dollar bid

“It looks pretty clear that the US is a late-cycle economy with high inflation and low growth. This stage of the cycle is synonymous with inverted yield curves. The dollar typically stays bid in this part of the cycle until convictions grow that the Fed will ease, and US 2-year yields start dropping. That is probably a story for 1Q23 and not today.” 

“We look for another 125 bps of Fed hikes this year and just 50 bps from the ECB (in Sep.). Risks look skewed to even higher US rates.” 

“With Europe entering recession on the back of a looming energy crisis this winter, EUR/USD can stay near the lows for 2H22.”