The US dollar's strength is forecasted which we expect to appreciate by more than 5% in REER terms over the next 12 months even though the Fed delays its lift-off. On this stronger USD outlook, we also project the EUR to remain investors' preferred short. The recent moves in FX crosses have left the EUR REER only 4.5% cheap relative to fair, and we look for EUR REER to depreciate by another 11% in the next 12 months.
On the flip side, the ECB is set to expand its QE program soon, pressured by weaker global growth, a softer inflation outlook, and tighter domestic financial conditions. We forecast EURUSD at 1.03 by year-end and 0.95 in 12 months. in addition to that we also expect the CHF to attract attention, as we expect the uptrend in EURCHF to be sustained.
Short EURUSD spot under tighter monetary conditions, falling commodity prices and an increase of the risks to foreign growth have reduced the near- and medium-term inflation outlooks as breakevens have fallen anew to near recent lows. We think that EURUSD will resume its downward trend based on our expectation of further monetary easing before year-end.