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Cuts from the Fed and the ECB are on the horizon. But how will the path for US and Euro area interest rates affect carry on EUR/USD? Economists at Danske Bank analyze the pair’s outlook.
It looks like carry on EUR/USD will stay around the current level next year, but the re-pricing of EUR/USD FX forwards since before the summer serves as a reminder of how quickly things can change.
Before the summer, the outlook for the US economy was grimmer and the market expected the Fed to cut much more than the ECB in 2024, which would reduce carry to around 1%. If the outlook deteriorates again, pricing of EUR/USD FX forwards will likely follow.
We are strategically bearish EUR/USD and look for the pair to fall to 1.05 in 12M. Whether carry stays around current level or falls next year, we think there are good arguments for why EUR/USD should still drop, including relative productivity, energy terms of trade and fiscal sustainability to name the most prominent.
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