EUR/USD to lose more ground as market is excessively priced for ECB rate hikes – MUFG

EUR/USD has visited 2021 lows around 1.1430. The policy divergence between the Federal Reserve and the European Central Bank (ECB) continues to drive the pair's action. Economists at MUFG Bank expect not to get any let-up on policy stimulus from the ECB, subsequently, EUR/USD should see another leg lower.

The market remains excessively priced for rate hikes in the eurozone

“The market remains excessively priced for rate hikes in the eurozone. While other markets may also be overpriced now (but have corrected somewhat) it is only the ECB that remains so adamant in its dovish guidance, guidance which is likely to be repeated strongly at the next meeting.”

“Over the coming months, the scope for further declines in EUR/USD could come from changes in tightening over a longer period. Currently, there is only a 10bp spread between 2yr and 3yr US OIS (135bps vs 145bps) but if the US labour market starts to recover strongly in the coming months, the markets view of rate hikes further out could change more relative to the eurozone – that could be the catalyst for another move lower in EUR/USD.”