**Westpac’s EUR/USD Forecast: Euro Poised to Reach 1.21 by Q3 2027**
*Original reporting by James Cundy | Source: ExchangeRates.org.uk*
Westpac, one of Australia’s leading banks, has provided a new medium- to long-term forecast for the EUR/USD currency pair, outlining projections up to the third quarter of 2027. According to their recent analysis, the euro is expected to climb steadily against the US dollar, reaching the 1.21 level by Q3 of 2027. This projection stands in contrast to recent market volatility and indicates a relatively optimistic outlook for the eurozone economy over the next few years.
This article provides a deep dive into Westpac’s projections, the macroeconomic factors influencing the EUR/USD exchange rate, and additional commentary from other financial institutions and analysts to contextualize Westpac’s forecast.
## Key Highlights of the Westpac Forecast
Westpac’s forecast for the EUR/USD exchange rate outlines gradual strengthening of the euro over the next three years:
– **End of 2025**: EUR/USD rate expected to be around 1.13
– **End of 2026**: Projected to rise to 1.18
– **Q3 2027**: Euro forecast to reach 1.21 against the dollar
This forecast implies a euro appreciation of approximately 10% over the next three years. Westpac’s outlook is founded on expectations of narrowing growth gaps between the United States and Europe, normalization of monetary policy in the eurozone, and slowing US economic momentum.
## Drivers Behind the Positive Outlook for EUR/USD
### 1. **Divergence in Growth Outlook Between the US and Eurozone**
One of the central themes in Westpac’s projection is the anticipated closing of the growth gap between the United States and the Eurozone. In recent years, the US economy has generally outperformed its European counterpart, leading to consistent strength in the USD.
However, from late 2024 and into 2025, Westpac expects:
– A moderation in US economic growth as the effects of higher interest rates and tighter financial conditions continue to weigh on domestic demand.
– European economies to experience a stabilization in their economic indicators, driven in part by higher investment, improved domestic consumption, and reduced energy price volatility.
– A narrowing of the real interest rate differential between the US and the Eurozone, reducing capital inflows into the dollar and helping to stabilize the euro.
### 2. **Monetary Policy Shifts and Central Bank Actions**
As is common with currency forecasts, expectations around interest rate policy are key drivers. Both the Federal Reserve and the European Central Bank (ECB) play enormous roles in shaping investors’ sentiment toward the EUR/USD pair.
#### Federal Reserve
– After an aggressive tightening cycle that began in 2022, the Fed is anticipated to gradually lower interest rates from late 2024 into 2025, particularly if inflation moderates and economic growth softens.
– US inflation has declined more slowly than initially expected, but continued declines could give the Fed room to cut rates, reducing support for the USD.
#### European Central Bank
– The ECB initiated rate hikes in 2022 to combat post-pandemic inflation, and though it has kept rates relatively high, the macroeconomic environment in the Eurozone is shifting.
– Westpac believes the ECB may adopt a more balanced stance, eventually easing monetary policy as inflation stabilizes, but at a slower pace than the Fed.
– A slower rate-cutting cycle in Europe compared to the US could provide relative support for the euro.
### 3. **US Dollar Overvaluation**
According to several economic models, the US dollar remains overvalued on a Purchasing Power Parity (PPP) basis, particularly relative to the euro. Over time, such discrepancies tend to result in depreciation of the overvalued currency and appreciation of undervalued counterparts.
– The dollar’s strength has been driven largely
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