– Written by
David Woodsmith
STORY LINK Euro to Dollar Forecast: September Fed Hike Could Decide USD Outlook
The Euro to Dollar exchange rate (EUR/USD) held close to 1.1600 last week despite another surge in US Treasury yields, with markets now focused squarely on Federal Reserve Chair Kevin Warsh and this week’s crucial policy decision.
A September rate hike is increasingly expected, but the bigger question for the Dollar is whether the Fed can ultimately deliver the tightening cycle already priced into markets.
EUR/USD Forecasts: Big Call for Feds Warsh
SEB expects the dollar to hold steady in the short term and potentially advance slightly over the remainder of 2026, but the bank expects the Euro to Dollar (EUR/USD) exchange rate will strengthen to 1.23 by the end of 2027.
Goldman Sachs, however, has a 12-month EUR/USD forecast of 1.12.
The main feature during the week was a slide in US Treasuries with the 10-year yield jumping to near 5.00% and the highest level for over three years. Higher energy prices contributed to the fears with Brent hitting 4-month highs above $100 p/b.
Despite this volatility, EUR/USD was held in relatively tight ranges and settled close to 1.16.
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The headline US inflation rate held at 3.4% for August with the core rate edging lower to 2.4% from 2.5% and in line with consensus forecasts.
Markets are now pricing in close to a 70% chance that the Federal Reserve will raise interest rates at this week’s meeting.
ING commented; “It is a close call, but after Kevin Warsh’s hawkish speech at Jackson Hole, we now see a 25bp Fed hike to 4.00% on 16 September.”
Markets also consider that the most likely outcome is three rate increases by March 2027.
According to SEB; “Rates have continued to rise during the summer and a sticky inflation scenario for the Fed now looks reflected in pricing. A question is if the Fed will be able to meet expectations – it is not obvious to us. Meanwhile Scott Bessent has begun a more activist approach via Yen intervention and increasing treasury buybacks, both having a negative Dollar impact.”
It added; “This is happening with a backdrop where the global positioning in the Dollar has only increased (via lower FX hedge ratios). Thus, the outlook would seem to be skewed towards Dollar weakness, triggered by an eventual global disinflation impulse (Hormuz reopening) – this is looking like a story for 2027 though.”
SEB did note Euro-Zone reservations; “French budget/election is a risk, but bias is that Euro can climb this wall of worry by avoiding the most negative market outcome.”
The ECB raised rates by 25 basis points at the latest policy meeting with the deposit rate hiked to 2.50%. There were also hints that a further increase is possible before year-end.
Euro-Zone energy prices continued to increase with natural gas prices at fresh 3-year highs.
Goldman Sachs commented; “On net, we see moderate risks of energy-driven EUR under-performance ahead.”
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TAGS: Euro Dollar Forecasts
