By Areena Fx
Foreign exchange analysts at Nordea predict a reversal of the current descending EURUSD trend, anticipating a climb in the Euro US Dollar exchange rate in the near-term outlook, pivoting on intricate ECB policy adaptations and economic data.
“We do not think the downward momentum in EUR/USD will last, and see the cross heading higher again soon,” says Jan von Gerich, Chief Analyst at Nordea.
The EUR/USD forecasts imply a strong bullish trend over the forthcoming years, from today’s current rate of 1.04797.
Diving into their projections, a forecasted rate of 1.07 by the end of 2023 reflects a prospective gain of approximately 2.1%, suggesting a moderately bullish outlook in the near term.
Advancing into mid-2024, the forecast sees EUR/USD rising to 1.10, giving investors a 5% gain from the present rate.
The trend is set to continue higher according to the analysts with a 1.12 forecast by the end of 2024, resulting in an approximate 6.9% rise from today’s x-rate.
The final longer term forecast predicts 1.15 by the close of 2025, signaling a potential overall appreciation of roughly 9.7%, signaling a long-term bullish stance for the EUR/USD.
ECB policy dynamics are key to their forecasts, with the analysts suggesting a pause in rate hikes, followed by a series of 25bp rate cuts per quarter, concluding with the deposit rate at 2.25% by the end of 2025.
“The higher-for-longer rhetoric is likely to stay for a number of meetings, but we think falling inflation will allow the central bank to start cutting rates towards more neutral levels next June,” says Von Gerich.
Adjustments extend beyond rate modulations, with von Gerich detailing a likely acceleration in reductions of the Eurosystem bond holdings.
This could manifest via outright sales in the Asset Purchase Programme (APP) holdings or a dialling back of reinvestments in the Pandemic Emergency Purchase Programme (PEPP), with an inclination towards the latter, anticipated to manifest in the initial half of the subsequent year.
“We find the latter more likely and expect such discussions to increase at the coming meetings and such reductions to materialise in the first half of next year,” the strategist adds.
Moreover, potential alterations in minimum reserve requirements, presently at 1%, loom, with notions of a significant increase from current percentages being mooted among some Governing Council members.
A benefit resides in the potential to conserve substantial Eurosystem funds, given the 4% deposit facility rate on excess reserves.
“That said, excess reserves are not divided evenly among banks and countries, so higher reserve requirements may have a bigger impact on some countries and banks than others,” von Gerich asserts.
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