The Euro to Dollar (EUR/USd) exchange rate failed to sustain gains seen in early May and has dipped to test support below 1.16 amid a firm dollar in global terms.
Danske Bank has expected the dollar to remain firm in the short term, but has now changed its stance and the bank expects that the US currency will strengthen over the longer term.
Previously, the bank had expected EUR/USD to strengthen back above 1.20 on a 12-month view, but it has now changed its position sharply and is forecasting a retreat to 1.12 by the middle of 2027.
High energy prices will represent a clear short-term risk for the Euro and ECB rate hikes may only provide limited support.
Danske Bank considers that the dollar outlook has changed. It notes that the data has been resilient while there has been evidence of increased inflation pressure while AI-related investment is boosting growth. In this context, it considers that cyclical factors now support the dollar.
Although it expects that the Federal Reserve will decide against rate hikes, it expects a tightening bias on inflation grounds and rate cuts are likely to be off the agenda which will support the US currency.
