EUR/USD dropped despite the ECB’s decision to hike. Economists at UBS discuss the pair’s outlook.
The ECB hiked rates to a record high of 4% last week, its 10th consecutive increase. The decision was accompanied by an increase in the central bank’s inflation projections, which are now expected to average 5.6% this year and 3.2% in 2024-still well above the 2% target.
We remain most preferred on the Euro and least preferred on the US Dollar. The ECB’s move narrows the rate premium offered by the US, and we don’t expect rate cuts from the Eurozone’s central bank until at least June next year. An acceleration of quantitative tightening, with the ECB increasing the pace at which it shrinks its balance sheet, is also possible early next year.
We expect EUR/USD to rise to 1.12 by the end of the year.
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