EUR/USD likely to plummet below 1.10 by mid-2022 – SocGen

Strategists at Société Générale see the EUR/USD at 1.09 in their base case outlook. In this scenario, the Fed rate-hiking cycle has started by mid-2022. In the upside scenario, the EUR/USD reaches 1.15, and in the downside, it reaches 1.06 as the Fed takes hikes off the table.

Base case for 2Q22 (50% probability)

“EUR/USD at 1.09. The Fed rate-hiking cycle has started by mid-year. While there are 110bp of hikes priced in for 2022/2023 (compared to 25bp from the ECB), we expect that by the time the Fed acts, there will be more priced into the US curve than is the case now and that EUR/USD will have fallen below 1.10.”

Upside scenario for 2Q22 (25% probability)

“EUR/USD at 1.15. The upside risk scenario for EUR/USD weighs two factors against each other. Firstly, it can bring forward forecasts of Fed tightening, as the economy does even better than expected. Secondly, it can have more influence on expectations of ECB tightening. It’s not just that a quicker escape from COVID-19 would have less impact on what is priced into the US curve than it would on the eurozone curve, it’s also that an ECB rate rethink could have a bigger psychological impact.”

Downside scenario for 2Q22 (25% probability)

“EUR/USD at 1.06. The downside scenario needs to be apocalyptic to take Fed rate hikes off the table in 2022. In the US, the danger is that from the current starting point of very strong nominal GDP growth, ‘bad Omicron’ increases inflationary pressures at the same time as growth slows. By contrast, the European recovery is lagging the US one and any talk of ECB tightening could vanish into fresh air. Throw in some risk aversion and we likely get a lower EUR/USD rate than our base case, though from here, the downside is limited.”