Euro-Dollar Forecasts Lowered at Commerzbank

Commerzbank HQ dominates the Frakfurt skyline. Image © Andre Douque, reproduced under CC licensing conditions.

Despite adding an extra ECB rate hike to their projections, Commerzbank lower the euro-dollar forecast profile.

The euro to dollar exchange rate will struggle to cross the 1.20 marker in the coming months says an updated forecast update from one of Germany's biggest financial services providers, Commerzbank.

In a mid-year forecast review, the lender and investment bank says the call rests with what the Federal Reserve will do to its own interest rates, confirming it's the dollar leg of the equation that matters the most.

In fact, on the ECB front, Commerzbank make what should be a supportive alteration to expectations, namely that the central bank will raise rates on two occasions.

"Since inflation is likely to remain above the 3% mark for longer, we now expect not only one rate hike at the next ECB meeting on June 11, but also a second one," says Commerzbank.

However, that additional rate hike means Commerzbank is still more dovishly aligned than the futures market, which shows investors are positioned for three rate hikes, which tees up the prospect of interest rate-linked disappointments for the currency.

"After all, the ECB Governing Council is dominated by proponents of a fundamentally accommodative monetary policy (doves) who understand the desire of highly indebted countries for key interest rates as low as possible," says Commerzbank.

"In the second half of next year, with inflation back below 2%, the central bank is likely to cut interest rates in two steps to 2% —returning them to the level seen before the Iran War," it adds.

Impact on Euro-Dollar Forecasts

The EUR/USD exchange rate has been trading within a range of roughly 1.15 to 1.18 since February, held back by the uncertainty posed by an Iran war that's proven supportive of USD.

"Since uncertainty surrounding the Iran conflict will remain high over the next two months, EUR-USD is likely to trend toward the lower end of the range. However, following an agreement between the U.S. and Iran, the dollar is likely to come under pressure again," says the bank.

Commerzbank does not expect the Federal Reserve to raise interest rates during this cycle - despite signs of rising U.S. inflation - but to cut them significantly starting in mid-2027 due to political pressure.

That can allow euro-dollar to push higher again.

However, "since we have pushed back the Fed’s rate cuts further, the dollar’s weakness should unfold somewhat more slowly than previously forecast," say analysts.

The bank now expects EUR/USD to be at 1.20 by mid-2027, whereas previously the high was seen at 1.21.