Several prominent Wall Street financial institutions are collectively revising their forecasts for the euro's trajectory. As market consensus grows that the United States will implement more aggressive interest rate hikes than Europe for the remainder of the year, institutional sentiment towards the euro's prospects has turned cautious.
JPMorgan Chase, Morgan Stanley, and Bank of New York Mellon all project that the euro could fall by more than 3% against the US dollar over the next year, potentially reaching around $1.10. This forecast follows the euro's decline to a one-year low this month, as markets begin to price in expectations for Federal Reserve rate hikes extending into 2026, while no longer fully anticipating synchronized rate increases from the European Central Bank.
Contrasting Outlook from the Start of the Year
This collective assessment marks a stark contrast to the beginning of the year. At that time, the euro had briefly surged past $1.20, reaching a near five-year high, prompting concerns from European policymakers about its excessive strength. However, the subsequent outbreak of conflict in Iran drove oil prices higher, bolstering demand for the US dollar. Coupled with the European Central Bank's relatively cautious policy stance, the euro has gradually lost its supportive underpinnings.
Morgan Stanley strategists, including David Adams, stated, "EUR/USD is vulnerable to a move toward 1.10 as medium-term investors cover structural dollar shorts and speculative flows add to the momentum."
Revised Targets from Key Institutions
Regarding specific forecasts, multiple institutions have significantly lowered their target levels. JPMorgan has revised its euro target for mid-2027 down to $1.10, while Royal Bank of Canada expects the currency to reach that level by the end of next year. Bank of America and Wells Fargo have also concurrently downgraded their expectations.
Although currency forecasts are typically adjusted in line with market shifts, the magnitude of these recent downgrades is notably large and is beginning to influence the overall consensus in surveys such as Bloomberg's, which had previously still anticipated the euro recovering to $1.20 next year.
Weakening Signals from Derivatives Market
Signals from the options market have also turned weaker. The one-year risk reversals indicator has dropped to its most bearish level since March 2025, indicating that investors must pay a higher premium to hedge against or bet on further euro depreciation. Wells Fargo strategist Marcus Jennings noted, "While the dollar may enter a period of consolidation in the near term, it's currently very difficult to fight the prevailing trend."
Diverging Central Bank Policies as a Core Driver
Shifts in the anticipated path of interest rates are a key factor driving the euro's weakness. Ahead of new Federal Reserve Chair Kevin Warsh's first policy meeting this month, markets were concerned he might face pressure from the US President to lean towards rate cuts. However, Warsh's clear communication of a firm stance focused on curbing inflation has prompted traders to renew bets on rate hikes within the year.
In contrast, European Central Bank President Christine Lagarde, after implementing a single rate hike this month, indicated that a more aggressive policy response to the impact of the Middle East conflict was unnecessary, citing expectations that inflation will return to target levels over the medium term. This communication was interpreted by markets as signaling a relatively dovish policy path.
Bank of New York Mellon strategist Geoff Yu pointed out, "We already believed the ECB should not have raised rates, and this move has actually weakened the euro's fundamental support because it puts pressure on economic growth." He added that while the euro could potentially fall below $1.10, he does not recommend aggressively chasing the short side.
Residual Optimism Among Some Market Participants
Some institutions maintain a relatively more moderate stance on the euro. For instance, certain investors believe the Federal Reserve may not follow through with rate hikes, or they hold greater confidence in the European economy. Bank of America has currently revised its year-end euro forecast from $1.20 to $1.15, while maintaining a "neutral" assessment.
However, bullish voices are diminishing. Kit Juckes, Chief FX Strategist at Société Générale, stated, "The euro's rally is essentially over." He emphasized that energy shocks typically have a negative impact on the euro, drawing a parallel between the current situation and the economic shock Europe experienced following the surge in energy costs after the Russia-Ukraine conflict in 2022.
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