The Euro is getting ahead of itself, but that may continue, according to Kit Juckes, Chief Global FX Strategist at Soci?t? G?n?rale.

“We expect the 10-year US-German yield differential to narrow from 180 to 115 bps by the end of Q1, and the 2-year rate differential to narrow from 190 bps to under 1%. The last time we saw those kinds of rate/yield differentials EUR/USD was above 1.15 which is where it will be by the end of Q1 if it goes on rallying at anything like the rate it has since hitting 0.95 at the end of September!”

“The caveat is that the correlation between rate differentials and EUR/USD has been awful recently. I’ve had better luck looking at relative growth expectations, but those have stabilized and while market sentiment is improving with regard to Europe, the Euro is overshooting to the upside on that basis.”

“There is definitely some year-end short-covering lifting the Euro, as well as optimism about the energy and geopolitical outlook. It may take us to Christmas but I’m going to try and resist the temptation to revise 2023 forecasts higher on the back of it!”

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