EUR/USD likely to hit high of around 1.21 in late 2017 before easing moderately in 2018, says ANZ Research

The EUR/USD currency pair is expected to hit a high of around 1.21 in late 2017 before easing moderately in 2018 as inflation in the euro area remains low. The shift in the ECB’s forward guidance in June and the transitioning towards a more balanced assessment of economic risks has pushed euro area bond yields higher and supported the euro.

However, over the longer term, it is doubtful that the conditions for a more sustained appreciation in EUR/USD are in place. Euro area inflation is still low and both the core measures and wages suggest that inflation is still some way short of returning sustainably towards target (just below 2.0% percent.

While the exchange rate is not a policy tool, it can have an important influence on inflation dynamics and the ECB expects HICP to ease in 2018 (forecast at 1.3 percent). The ECB will not want to encourage developments that could undermine a return to target inflation over the forecast horizon.

"In an environment where the current softness in US inflation has tempered expectations that the Fed will raise rates in September and fostered greater ambivalence towards a December rate hike, EUR/USD has continued to appreciate. Based on available information, we see little to alter this trend in the near term and further gains towards 1.20 or slightly beyond are possible in the coming months," ANZ Research commented in its latest report.

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