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EUR/USD’s other declines possible in the near term

The European Central Bank raised key interest rates by 75 basis points on Thursday, in line with market expectations. The statement and Lagarde’s comments suggested more rate hikes ahead. The euro lost ground across the board after the meeting while the dollar rose boosted by Fed’s Powell remarks.

Analysts believe there will be more declines in the EUR/USD pair in the near term as the Fed tightens further and amid the economic outlook of the Eurozone.

Following Thursday’s record rate increase, we now forecast the European Central Bank will raise its Deposit Rate another 50 basis points in late October and also 50 basis points in December, lifting the Deposit rate to 1.75% by the end of this year. We expect a final 25 basis point rate increase to 2.00% in early 2023.

From forex perspective, some further declines in the euro ARE expected in the near-term, given the Fed remains firmly in tightening mode for now and with the Eurozone economic outlook less than stellar. Some rebound in the euro in 2023 as a steady ECB monetary policy outlook sees the euro outperform against the U.S. dollar, with the latter likely weighed down by the anticipation and eventual implementation of Fed’s monetary easing by late 2023.

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