Deutsche Bank Projects Euro to Hold Firm Against Dollar, Citing Global Growth and Peaked Fed Pricing

Deutsche Bank analysts believe the euro will hold its ground against the U.S. dollar rather than break to new lows, maintaining a year-end forecast of 1.17 for the EUR/USD pair. The bank's view comes as the currency trades near the bottom of its year-to-date range of 1.13-1.20.

Factors Supporting the Euro

In a recent note, the bank outlined three primary reasons for its outlook, arguing that the drivers of recent dollar strength are losing momentum.

• Resilient Global Growth: Stronger-than-expected economic activity outside the U.S. is a key factor. The bank cited upward revisions to UK GDP, another rate hike by the Reserve Bank of Australia, Chinese stimulus, and European PMI data consistent with above-trend growth.
• Complete Fed Pricing: The market has now fully priced in the Federal Reserve's terminal interest rate, limiting a key source of dollar support. New York Fed President Williams' recent pushback on consecutive rate hikes reinforces this view.
• Priced-In Energy Shocks: The initial shock from higher energy prices appears to be largely priced into the market, with risks now skewed toward improvement. Normalizing oil flows from the Middle East are consistent with oil prices moving closer to $90 per barrel.

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Market and Policy Outlook

Deutsche Bank strategists noted that any further increases in U.S. interest rates are more likely to stem from a higher term premium rather than Fed policy hikes. Historically, a rising term premium does not typically support dollar appreciation. The bank's fixed income team has positioned for this by entering U.S. steepeners and favoring long Japanese government bonds over U.S. Treasurys.

Geopolitical factors may also play a role, according to the bank. Analysts see a strong incentive for de-escalation between the U.S. and Iran ahead of the midterm elections, which could help stabilize energy markets further. The bank's assessment concludes that the market is already pricing in a substantial risk premium, leaving room for positive surprises.