EUR/USD to move lower toward H2 on weaker global growth, relative US economy outperformance – Danske Bank

FXStreet Insights Team FXStreet

The Fed can continue to tighten monetary policy via QT. Economists at Danske Bank analyze its implications for the EUR/USD pair.

Fed can likely continue QT well into 2024

As bank reserves remain at healthy levels, the Fed can likely continue QT well into 2024.

The ongoing QT will weigh on bank reserves over time, but for now, the drain of the Fed's overnight reverse repo facility (ON RRP) as well as the liquidity support from the Bank Term Funding Program (BTFP) means that tightening liquidity conditions will not be high on the markets' list of worries in the near-term. If anything, the June development has been a modest positive surprise, evident in the narrowing of the EUR/USD OIS basis.

The abundant USD liquidity, all else equal, is likely also a supporting factor for the EUR/USD spot, but we still believe the cross will move lower towards H2 following weaker global growth and relative outperformance of the US economy.

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FXStreet Insights Team

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