The EUR has continued to weaken against the USD over the past month, and hit a fresh year to date low of 1.1186. Economists at MUFG Bank are maintaining their bearish bias for EUR/USD but the balance of risks is no longer as heavily weighted to the downside.
ECB and Fed to react differently to the Omicron risks
“We still believe there is scope for the EUR to weaken further against the USD in the near-term but a large part of the adjustment lower has already played out now. Further ownside is more likely to prove more of a hard grind from here as the pair finds stronger support closer to the 1.1000-level.”
“We expect the Omicron variant to reinforce the fundamental argument for a stronger USD relative to the EUR. There is higher risk of tighter restrictions being re-imposed in Europe compared to in the US.”
“The Fed has signalled that it is now putting more weight on upside inflation risks and plans to speed up tightening plans. It could take a more significant negative shock to the US economy to materially alter the Fed’s plans. In contrast, we expect the ECB to continue to display more caution over tightening policy. Overall, the ECB will remain one of the more dovish G10 central banks as it continues to carry out QE through most if not all of next year.”