Euro Q4 Fundamental Forecast: More Euro Weakness Likely Lies Ahead

  As the third quarter of 2021 was ending, there was still no indication that the European Central Bank was considering changing its view that Eurozone inflation will be “transitory.” There remains every chance, therefore, that it will begin to tighten its monetary policy long after the US Federal Reserve and many other central banks, and that the EUR/USD weakness seen in Q3 will continue.

  The ECB staff spelled this out clearly in their macroeconomic forecasts for the Eurozone published in September. “The inflation outlook remains characterised by a hump in 2021 followed by more moderate rates in 2022 and 2023. Inflation is expected to average 2.2% in 2021, driven by temporary upward factors,” they said. The team then predicted that inflation would drop to 1.7% in 2022 and 1.5% in 2023, both well below the central banks target of 2% over the medium term.

  This relaxed attitude to rising consumer prices contrasts strongly with the attitude of the Federal Reserve, which argued soon after that tapering policy “may soon be warranted” – leading to the inevitable conclusion that it will likely move in November or December and that EUR/USD will continue on its path lower.



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