Deutsche Bank is sticking to its year-end euro dollar forecast, even as the euro faces pressure. The bank cites steady global growth and limited US rate hikes as reasons to expect the euro to stay in its usual range.
Traders betting on a runaway dollar are not getting support from Deutsche Bank. The euro has hovered near the bottom of its 1.13 to 1.20 range against the US dollar this year. Still, the bank is not budging from its call: the euro will end the year at 1.17 to the dollar. That puts Deutsche Bank at odds with market chatter about a possible euro breakdown. The bank says the global economy is too steady for a lasting dollar surge. In late September, the euro traded around $1.1341. The dollar was on track for its biggest monthly gain against the euro in 14 months, based on Reuters pricing data. The dollar has climbed almost 2.5% against the euro in September. This would mark a third straight quarter of gains for the greenback. The trend is clear. The dollar has been strong.
Growth and policy set the tone
Deutsche Bank analysts point to several global shifts keeping growth on track. The US Federal Reserve looks close to ending its rate hike cycle. Investment in artificial intelligence and moves toward strategic autonomy are driving global spending. The UK revised its first-half GDP higher, thanks to more IT investment. The Reserve Bank of Australia raised rates again after strong economic numbers. China rolled out new stimulus. European purchasing managers' indices still show above-trend GDP growth. But the euro faces headwinds. High energy prices and political risk in Europe are weighing on the currency. Traders still expect at least one more euro-zone rate hike this year, according to the European Central Bank.
On policy, Deutsche Bank says the market has already priced in most US rate hikes. New York Fed President John Williams recently pushed back on the idea of back-to-back hikes. He hinted the cycle could be done. This softer tone from the Fed has cooled talk of more tightening. The message is simple. The US policy rate is near its peak. Deutsche Bank argues that if US rates rise further, it will likely be from a higher term premium. That has not led to lasting dollar strength in the past.
Market positioning and energy risks
Deutsche Bank's fixed income team has changed course. They are now in US steepeners and prefer long Japanese government bonds over US Treasurys. The bank sees the recent energy price shock as mostly priced in. Risks now lean toward improvement. Oil flows from the Middle East are getting back to normal. Deutsche Bank expects oil to settle near $90 per barrel by year end. The market still prices in a big risk premium. But the next few months could bring US-Iran de-escalation. The US administration wants a diplomatic win before midterm elections. In France, consumer inflation jumped more than expected in September. LSEG pricing shows about 90 basis points of extra ECB hikes priced in by year end. Inflation is still a problem for the euro area, as Reuters reports.
For the euro dollar pair, Deutsche Bank's FX Blueprint says the euro will not break below its current range. The bank expects EUR/USD to hit 1.17 by year end. This call rests on steady global growth, few new US rate hikes, and energy markets returning to normal. Other major banks have echoed this view in recent analysis, also targeting 1.17 for the euro dollar rate.
Key data and forecasts
Right now, the euro dollar rate sits near the low end of its 1.13 to 1.20 range for the year. Deutsche Bank's year-end forecast is 1.17 for EUR/USD. The bank's stance is built on the UK's GDP revision, ongoing rate hikes in Australia, new Chinese stimulus, and European PMIs showing above-trend growth. The Federal Reserve's terminal rate is seen as mostly priced in. Any further increases are expected to come from term premium, not more policy hikes. According to Reuters, the euro has held up better than many expected thanks to steady growth. But high energy prices and stronger US rate expectations are clouding the short-term picture.
How term premiums affect currency moves
Term premium is the extra yield investors want for holding long-term government bonds instead of rolling over short-term debt. When term premiums rise, it can mean more uncertainty about inflation or fiscal policy. But it does not always make a currency stronger. In the US, higher term premiums have sometimes gone hand in hand with a weaker dollar. This happens when global investors see better growth or higher yields elsewhere. For the euro dollar pair, Deutsche Bank thinks any new US rate increases driven by term premium will not spark a lasting dollar rally. That is especially true if global growth stays solid and energy risks fade. The Federal Reserve and European Central Bank remain in focus. Markets are watching policy meeting minutes and inflation data for clues on what comes next.
