Interest rate differentials have played a huge part in driving the EUR/USD exchange rate this year. Economists at Rabobank analyze the pair’s outlook.

ECB is close to reaching its peak in policy rates

The release of weaker-than-expected US CPI inflation data last week cemented market expectations that the Fed will reach its peak policy rates after an anticipated 25 bps hike in rates next week. As a result, the USD lurched lower across the board. In the coming months, it is very likely that the ECB will also reach its peak policy rate, and this is likely to undermine the attraction of the EUR.

On anticipation that the ECB is close to reaching its peak in policy rates, we expect EUR/USD to end the year at lower levels and see risk of a move back to the 1.08 region on a three-month view.