**Euro to U.S. Dollar Exchange Rate Could Climb to 1.23, Says Danske Bank**
*By Joel Lewin, as originally reported in PoundSterlingLive*
The euro may be poised for significant gains against the U.S. dollar over the next year, with Danske Bank forecasting a potential rally in EUR/USD to 1.23 by mid-2025. This bullish outlook is underpinned by several macroeconomic and monetary policy dynamics, including diverging interest rate paths between the European Central Bank (ECB) and the Federal Reserve, relative economic performance, and shifts in investor sentiment.
Currently, the EUR/USD pair trades in the 1.08 region, presenting a notable upside if Danske’s forecast comes to fruition. The Bank’s target suggests a rise of nearly 15 percent from current levels, indicating deep confidence in the euro’s ability to outperform the dollar over the longer term.
### Key Drivers Behind Danske’s Bullish EUR/USD Forecast
Danske Bank’s projection is based on a wide array of fundamental factors, ranging from central bank policy divergence to long-term inflation expectations and global economic growth patterns. Below are the primary drivers they identify:
#### 1. Divergence in Economic Cycles
– Danske analysts expect the eurozone and the United States to experience different stages in their respective economic cycles by 2025.
– The U.S. economy is anticipated to slow further in 2024 and into 2025, suffering from the lagged effects of monetary tightening and reduced fiscal support.
– In contrast, the eurozone is projected to recover moderately, aided by lower energy prices and a gradual improvement in industrial production.
– This divergence could result in market expectations of more aggressive rate cuts in the U.S. than in the eurozone.
#### 2. Interest Rate Expectations
– Danske foresees the Federal Reserve initiating more pronounced rate cuts ahead of the ECB, resulting in a narrower interest rate differential between the U.S. dollar and euro.
– Current markets are pricing in the Fed cutting rates more quickly in response to weakening economic data and slowing inflation.
– Although the ECB is also expected to lower rates, its moves are likely to be more measured, supporting the euro by maintaining some yield premium.
– Lower relative U.S. rates reduce the appeal of dollar-denominated assets, prompting capital outflows from the U.S.
#### 3. Inflation Trends and Real Rates
– U.S. inflation is expected to converge toward the Fed’s 2 percent target, helping anchor inflation expectations and justifying easing monetary conditions.
– In the eurozone, inflation is also moderating, though concerns linger about underlying price rigidity, particularly in the services sector.
– As real interest rates in the U.S. decline more sharply than in the eurozone, downward pressure on the dollar will mount.
#### 4. Valuation Metrics
– The EUR/USD remains undervalued relative to its long-term equilibrium, according to Danske’s internal models.
– Purchasing power parity indicators and other fundamental valuation tools suggest scope for euro appreciation.
– Historically, currency pairs tend to revert to their long-term mean over time, especially when macroeconomic divergence narrows.
#### 5. Shifting Capital Flows
– A reallocation of global capital could favor European assets, especially as eurozone equities and bonds become more attractive against a backdrop of lower U.S. returns.
– Emerging market investors reducing U.S. exposure due to geopolitical tensions and dollar overvaluation may also contribute to broader dollar weakness.
#### 6. Improved Sentiment and Stability in the Eurozone
– Political risk in the euro area has reduced compared to previous years, and fiscal policy is perceived as more coordinated post-COVID.
– Stability within the euro bloc increases investor confidence in the single currency, enhancing demand.
– Improved sentiment around core eurozone economies, such as Germany and France, will also lend support to the euro.
### Medium-Term and Long-Term Outlook for EUR/USD
Read more on EUR/USD trading.