EUR/USD: Accelerated tapering by the Fed to pull the pair toward 1.10 – Scotiabank

EUR/USD is little changed ahead of the Federal Reserve. The Fed is widely expected to accelerate the tapering of its bond purchases, which should drag the pair down towards 1.10, economists at Scotiabank report.

Weak inflation outlook set to weigh on the euro

“With inflation set to miss the 2% goal over the latter part of the forecast horizon, it then seems highly unlikely that the ECB will increase rates sooner than late-2023/early-2024 and this would require sustained inflation expectations around 2%.” 

“Market pricing that sees 10bps in hikes by end-2022 and another 20bps in rate hikes by end-2023 is too optimistic and we think that near-term rate differentials will continue to act as a major determinant of EUR underperformance over the next two years.”

“Today’s confirmation of accelerated tapering by the Fed, to likely be followed by a hike in Q2, will act to pull the EUR toward 1.10 in the coming months – if not sooner, in tandem with energy and virus worries in the Eurozone.”