EUR/USD: A break of 1.10 is possible early in 2022 – Nomura

EUR/USD is set to downward in the first quarter of the new quarter. Nonetheless, economists at Nomura expect the world’s most popular currency pair to recover some ground in the second quarter.

ECB set to maintain accommodative policies into Q1 2022

“Rising COVID-19 cases, lockdowns, a declining euro area trade surplus, fixed income outflows and lacklustre equity inflows in the euro area explain why we expect continued EUR/USD weakness, expecting a move through Q1 2022 towards 1.10.”

“We also have the uncertainty of the April French elections and the recent economic slowdown in China to affect European growth figures. These all add to our conviction that in Q4 2021/Q1 2022 the market will price in more hikes from the US Fed than from the ECB and EUR/USD will trend lower.”

“In early Q2 2022, we expect EUR to rebound with covid vaccine boosters, an economic reopening in the euro area, elections out of the way, and more importantly, signs that inflation is more robust than the ECB expects.”

“If we allow for higher wages and higher inflation than the ECB expects in 2022, the market will likely remain comfortable pricing in expected rate hikes by the ECB in 2022/23. Despite our optimism, an aggressive ECB rate hiking cycle is unlikely. Meanwhile, the risk of high US inflation is just as acute. As we see the Fed waiting until September 2022, the pricing for May 2022 might prove to be too much and this would allow USD softness in Q2.”