Analysts at MUFG Bank, point out that policy divergence and geopolitical risks will remain a weight on the euro in the near term, reinforcing the bearish trend in the EUR/USD pair. They see a widening policy divergence between the European Central Bank and the Federal Reserve, as the FOMC plays catch up with upside inflation risks.

Key Quotes:

“The EUR has fallen to fresh lows against the USD over the past week after breaking below the November low at 1.1186. It takes the pair closer to the lows during the initial phase of the pandemic when it briefly traded between 1.0500 and 1.1000 from February 2020 to May 2020. At the same time the EUR/GBP is trading close to recent lows at just above the 0.8300-level, and pre-pandemic lows from February 2020 and December 2019 at around 0.8280. The EUR has been now trending lower against the USD since June of last year, and for just over a year against the GBP.”

“The EUR’s downward momentum has been reinforced by the Fed’s hawkish policy update in which Fed Chair Powell opened the door to faster rate hikes than during the previous tightening cycle.”

“Recent developments support our forecast for EUR/USD to fall to 1.1000 in Q1. Downward pressure on the pair could be reinforced in the near-term if tensions between Russian and the Ukraine intensify. The bearish EUR trend would be challenged though in the week ahead if the ECB does not push back as strongly against rate hike expectations for this year.”

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