EUR Update: Euro weighed down by near-term factors, medium-term outlook rosier

In September, the euro underperformed against peers as a combination of supply-chain disruptions, rising energy prices and climbing bond yields spiralled into an inflationary shock and downgrades in eurozone growth outlooks. This weighed on the single currency, along with German election uncertainty and lower real rate differentials, while broader market sentiment also deteriorated as these developments weighed on global growth expectations too. The US dollar meanwhile grew stronger amid this inflationary backdrop as investors took refuge in safe havens excluding JPY – due to the Bank of Japan’s monetary policy regime, the Japanese yen was weighed down by widening rate differentials along with the euro. While September’s losses were significant at over 2%, we expect the pressure on the euro to ease over the coming months as supply pressures mitigate, which should help to cool inflation and aid growth conditions. We expect the combination of these developments to be supportive for EURUSD, however we have downgraded our forecasts throughout the entire forecast horizon to show a more contained rally and account for the recent developments in markets.

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Author: Ima Sammani, FX Market Analyst

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