Deutsche Bank judges that the euro is likely to stay inside its current trading corridor against the dollar, rather than slide to new lows, even as EUR/USD trades near the lower bound of the 1.13-1.20 range established this year. The firm maintains a year-end EUR/USD forecast of 1.17.
The bank highlights several factors that counterbalance dollar strength. First, it points to resilient global growth, driven in part by capital expenditure related to artificial intelligence and by efforts toward strategic autonomy. These forces, Deutsche Bank says, support demand outside the United States and reduce the likelihood of a sharply stronger dollar.
Deutsche Bank notes a series of recent data points consistent with that view. UK first-half GDP was revised higher, with IT spending cited as a driver. The Reserve Bank of Australia raised interest rates again on the basis of Australian economic resilience. Global data surprises remain at year highs, China announced additional stimulus measures, and European purchasing managers indices indicate activity consistent with above-trend GDP growth.
On monetary policy, the bank argues that market pricing for the Federal Reserve's terminal rate looks complete. It cites a comment from New York Fed President Williams, who pushed back overnight on the idea of successive rate hikes, as supporting the view that further policy tightening in the US is less likely to be the primary driver of dollar appreciation.
Deutsche Bank adds that if US interest rates move higher from here, it is more likely to be through a rise in term premium rather than through further increases in policy rates. The bank notes that historically a higher term premium has not supported dollar appreciation. Its fixed income team has taken specific positions aligned with that assessment, entering US steepeners and expressing a preference for long Japanese government bonds versus US Treasuries.
Energy prices are another important input to the bank's outlook. Deutsche Bank says the shock to energy prices appears increasingly to have been priced in, with risks skewed toward improvement. It reports that Middle East oil flows are normalizing, an outcome consistent with oil prices nearer $90 per barrel by year-end. The bank also observes that the market is placing a substantial risk premium on oil, while the coming period presents strong incentives for US-Iran de-escalation, as the US administration seeks a political win ahead of midterm elections.
Overall, Deutsche Bank's FX Blueprint retains the view that EUR/USD will reach 1.17 by year-end rather than breaking below the current range. Market snapshots included in the bank's commentary show EUR/USD up 0.28%, LCO down 2.06% and JGB down 0.16% at the time of the note.