Nordea expects that Euro to Dollar (EUR/USD) exchange rate will come under pressure as the ECB cuts rates before the Federal Reserve.
It forecasts a decline to 1.04 in three months before a very tentative recovery and an advance to 1.10 at the end of 2025.
EUR/USD has posted net gains to above 1.08 amid evidence of a slightly weaker US economy, but Nordea considers that the data still points to US resilience.
Given inflation data, it considers that the Federal Reserve will have to be patient and need several months of positive data before making a move.
In this context, it considers that September is too early and that a cut will have to wait until December, after the Presidential election.
In contrast, Nordea remains very confident that the ECB will cut rates in June.
The divergence theme is likely to undermine the Euro, with the bank comfortable with a soft Euro.
Overall, it expects that EUR/USD will weaken during the Summer and it also considers that there are downside risks to its forecasts.
Nordea does, however, expect that the ECB will be cautious in sanctioning further rate cuts, limiting potential currency losses.
The bank also expects that US interest rate cuts will lead to modest dollar depreciation over the medium term.
Key Quotes:
"EURUSD has moved largely sideways during the past year, in line with our view."
"We believe EURUSD will likely fall during the summer as it becomes clear that the ECB and Fed are on a somewhat different path when it comes to rate cuts."
"Eventually, a lower Fed funds rate will push EURUSD up even if the rate differentials between the USD and EUR are somewhat wider than today."
"Moreover, the postponement of Fed cuts points to weaker risk-sensitive currencies such as the NOK over the summer."
"Eventually, we still hold the view that lower rates in the US and a weakening of the USD will give a firmer footing to global growth and risk-sensitive currencies, but this will take time."
"Finally, we abandon the view of the JPY strengthening materially over the coming years due to the fact that rates will likely stay lower in Japan relative to other developed economies for years to come."