EUR/USD to drop like a stone to 1.16 by year-end – Nordea

The recent rise in long yields has started to worry the European Central Bank (ECB), and economists at Nordea expect the pace of the increase to moderate from here. Meanwhile, US yields have more upside potential. 

In the view of economists at the Finland-based bank, EUR/USD has already peaked and will fall to 1.16 by the end of the year.

Key quotes

“Given another sizable stimulus package is in the pipeline from the Biden administration and the green light from the Fed for yields to rise further, we see much more potential for longer US yields to continue to rise compared to European ones.”

“It remains to be seen how aggressively the ECB is prepared to fight rising nominal yields. At least for now, the ECB has not made big changes to the pace of the PEPP. We see potential for at least some further moves up on the back of the recovering economy and higher US yields, especially as broader financing conditions remain easy and we expect further falls in EUR/USD to ease the ECB’s worries about an overly strong currency.”

“We stick to our view that the USD is at risk of wrong-footing the consensus once more, and strengthen rather than weaken in 2021, and accordingly decide to lower our year-end forecast for EUR/USD to 1.16.”