EUR/USD to nosedive to 1.12 in 2022 on stark Fed/ECB contrast – SocGen

FX analysts at Société Générale have updated their euro forecast from 1.22 to 1.19 in 2021 and from 1.26 to 1.12 in 2022, pointing to much weaker EUR/USD than previously anticipated.

See: EUR/USD to edge lower towards 1.16 on Fed’s hawkish tilt – Rabobank

Fed’s rate-hiking cycle to strengthen the dollar

“The Fed funds rate target isn’t going to change any time soon. The rates market is pricing 12.5bp of hikes by the end of 2022 – so still nothing for at least 12 months.”

“FX has been following rates moves rather than the other way around, but even so it’s a stretch to think that rate hike expectations will simply settle down for the next 12 months.” 

“To justify EUR/USD trading down to 1.12 (our 3Q22 forecast), the yield differential needs to widen by over 100bp. EUR/USD pretty much always overshoots the rate cycle, but the overshoot isn’t likely to happen until the rate cycle is much more imminent.”