EUR/USD moved lower in November with the stance of the ECB in stark contrast to the increased speculation of a more active Federal Reserve in reversing monetary accommodation. Economists at MUFG Bank expect the euro to rebound modestly vs. the USD later in 2022 as the European Central Bank (ECB) could turn more hawkish next year.
QE in 2022 could be left undetermined due to Omicron
“Even though we are not in a position to know the detailed make-up of Omicron, assuming it is not a major setback in the battle against covid, the divergence in policy is likely to be maintained. Hence, assuming Omicron does not evolve into the worst-case scenario of a more severe and more infectious strain, we expect Fed rate hike expectations to remain elevated and possibly revert back toward the pre-Omicron level of close to three rate hikes in 2022 – which will provide support for the dollar over the short-term.”
“The emergence of Omicron makes for a difficult policy meeting on 16th December when the markets expect details on QE policy after PEPP ends in March. If Omicron uncertainties remain high then, the decision on the size of APP after PEPP may be left until Q1 2022. But either way, we expect some level of QE to persist throughout most of 2022 which will further reinforce the divergence in rate policy with most of the rest of G10.”
“The EUR will be well anchored through to end-Q1 2022. But beyond then, a more dovish Fed failing to deliver on expected rate hikes and building expectations of QE ending in the eurozone that could open up the prospect of ECB hikes in 2023 will allow EUR/USD to slowly grind higher from current cheap levels.”
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