Berenberg Bank Forecasts Euro to US Dollar Exchange Rate at 1.22 by End of 2026
Original Reporting by Matt Vore of ExchangeRates.org.uk
Overview
In an in-depth market analysis, German investment bank Berenberg has revised its euro-to-US dollar (EUR/USD) forecast, predicting a steady appreciation of the euro over the coming years. According to the bank, the euro is expected to climb gradually from current levels and reach 1.22 by the end of 2026. The report, authored by Matt Vore and published on ExchangeRates.org.uk, outlines several fundamental factors supporting this view, including interest rate convergence, macroeconomic resilience in the eurozone, and a cooling US economy.
This article will delve into the core elements of Berenberg’s analysis, explore the broader economic indicators at play, consider the possible risks, and provide a detailed look at the underlying trends affecting the EUR/USD exchange rate trajectory.
Current EUR/USD Market Context
As of mid-2024, the EUR/USD exchange rate has fluctuated within a relatively narrow band, confined largely between 1.06 and 1.10. Historically one of the most traded currency pairs in global forex markets, the euro and the dollar’s movements are driven by a wide range of factors, including:
– Central bank monetary policy (European Central Bank vs. Federal Reserve)
– Relative economic performance of the eurozone vs. the US economy
– Interest rate differentials between the two currencies
– Liquidity flows and investor sentiment
– Geopolitical factors and global risk appetite
Berenberg’s projection for a strengthening euro by 2026 suggests confidence in the eurozone’s ability to navigate both current and future economic challenges.
Key Drivers Behind the Forecast
Berenberg’s projection for a 1.22 EUR/USD rate at the end of 2026 is underpinned by multiple economic and monetary policy assumptions. The bank identifies both structural and cyclical trends pointing to a rebalancing of the transatlantic monetary gap.
1. Interest Rate Convergence
– The Federal Reserve has led a tightening cycle characterized by rapid interest rate increases to combat persistently high inflation. However, as inflation comes under control, interest rates are expected to decline in the US by late 2024 and into 2025.
– In contrast, the European Central Bank (ECB) has maintained a relatively measured pace in its monetary tightening and may keep interest rates stable for a longer period due to its cautious approach toward inflation and underlying eurozone economic fragilities.
– As the interest rate differential narrows, the appeal of the US dollar for yield-seeking investors could diminish, leading to relative strengthening in the euro.
2. US Economic Slowdown
– Berenberg expects that by 2025–2026, the US economy will show signs of slowing after a period of robust post-pandemic recovery.
– The report projects that the US labor market will decelerate, combining with output contraction or slower growth, which would reduce inflationary pressures and hasten rate cuts from the Federal Reserve.
– Lower domestic demand could also lead to a weaker dollar as investor appetite shifts toward currencies with more favorable macroeconomic outlooks.
3. Eurozone Economic Resilience
– Contrary to recent years, when the eurozone struggled with energy shocks, sluggish growth, and post-Brexit tensions, Berenberg believes the bloc will prove more resilient in the medium term.
– Easing inflation and a normalizing energy market, especially amid improved transition to alternative energy sources away from Russian supplies, supports the euro area’s long-term stability.
– The European Union’s commitment to fiscal discipline and structural reforms under initiatives like the Recovery and Resilience Facility may contribute to long-term economic recovery, providing a stronger foundation for the currency.
4. Global Risk Appetite
– The global market is expected to gradually return to risk-on sentiment as major geopolitical uncertainties—such
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