According to Nordea strategists Sara Midtgaard and Henrik Unell, the Euro (EUR) is poised for medium-term appreciation against the US Dollar (USD) due to anticipated policy divergence between the European Central Bank (ECB) and the Federal Reserve (Fed) [1]. Nordea expects the ECB to implement a total of four rate hikes this year, which is more than the roughly three hikes currently priced in by markets [1]. In contrast, the strategists' baseline scenario is that the Fed will keep rates unchanged over the next two years, even if US inflation accelerates [1].
The strategists note that a key driver behind the dollar's appreciation in May was the repricing of Fed expectations, as markets shifted from expecting rate cuts to considering additional tightening [1]. However, Nordea maintains that the Fed is likely to remain on hold, while the ECB continues tightening [1]. They highlight that divisions within the Fed could make the central bank less decisive in responding to higher inflation, as policymakers are increasingly split between those favoring rate cuts and those open to further hikes [1].
Nordea argues that if inflation continues to rise in both the US and the euro area, but only the ECB responds with tighter monetary policy, the euro could strengthen while the dollar weakens [1]. The strategists suggest that market focus may shift under these circumstances, favoring the euro over the dollar [1].
No immediate market reactions or analyst opinions beyond Nordea's outlook are discussed in the article [1].
CONCLUSION
Nordea's analysis points to a medium-term strengthening of the euro against the dollar, driven by expectations of more aggressive ECB tightening compared to a static Fed policy. The anticipated policy divergence is seen as a key factor supporting euro gains, especially if US inflation rises without a corresponding Fed response. Market participants may increasingly favor the euro if these scenarios materialize.