EUR/USD has dived below parity again. Economists at Westpac forecast the pair at 1.02 by year-end before staging a substantial rise to 1.12 by the end of 2023.

Real-term interest rate differential could provide significant support to euro

“EUR/USD is forecast to rise only slightly to 1.02 by end-2022, but then more sharply to 1.12 at end-2023 and 1.15 by mid-2024.” 

“While we expect the overnight interest rate differential between Europe and the US to remain significant over the forecast horizon, term interest rate differentials should narrow on both a nominal and real basis as inflation rates normalise and risks recede.” 

“With the help now being offered to households in Europe, and rapid moves to diversify away from Russian gas, the real-term interest rate differential could provide significant support to euro through the first half of 2023, as long as we do not see a further material escalation by Russia. A rebound in activity growth from mid-2023 will add support to this trend.”