Economists at ING expect the Fed to cut rates by 100 bps and US-Eurozone divergence to drive EUR/USD to a 1.20 peak. However, some risks – including the US debt ceiling stalemate – can keep the Dollar afloat in the short term.

Dollar underperformance in the latter part of the year

“The widening of the US-eurozone and Fed-ECB divergence in the latter part of this year and the start of next year led us to revise our EUR/USD forecast higher: we now expect a peak at 1.20 in 4Q23/1Q23, before a descent to 1.15 toward the back-end of 2024 as the ECB starts easing.”

“The short-term outlook is admittedly less of a clear-cut bearish story for the Dollar. If US banking stress can hit the Dollar via the rate cut channel in the longer run, it can also keep it afloat in the short term by hurting risk sentiment and increasing safe-haven demand. Should the US debt ceiling stalemate result in substantial turbulence in money markets, it can also lead to a dramatic increase in demand for Dollars.”