Without the support of additional hawkishness from the European Central Bank (ECB), economists see limited tailwinds for the EUR against higher-yielding/hawkish central bank currencies such as the USD and CAD over the coming quarters. The EUR may, however, gain some ground against currencies like the GBP and AUD, with markets anticipating even more misplaced hiking bets for their respective central banks. 

EUR upside is narrowing

“With limited room for more hikes from the ECB over the coming year than what markets are anticipating, there are no major EUR tailwinds for the quarters ahead aside from a marked decline in energy prices alongside a Ukraine war ceasefire. Even with a détente, the eurozone is bound to face high energy prices that limit growth with sanctions on Russia maintained and the bloc meeting a higher share of its energy needs from other, costlier sources.” 

“With markets, and some economists, anticipating that the Fed and the BoC will hike to 3% next year, yield differentials will remain an important drag on the EUR against the USD and the CAD – with EUR losses heading to 1.08 and 1.35 against these currencies, respectively. 

“The EUR may fare better against the GBP since markets have placed even more unlikely bets on BoE hikes this year, seeing a policy rate of 2-2.25% by end-2022 – at least 75bps higher than BoE guidance suggests. Here, EUR/GBP looks set to climb to 0.87, at least, in coming weeks as the BoE douses tightening expectations.”

“An easing of overextended RBA expectations and a possible normalization of commodity prices should also help take EUR/AUD back above 1.50 while a very dovish SNB and an overvalued franc against the EUR points to the EUR/CHF targeting a test of 1.06.”