Commerzbank analysts have slightly changed their forecast for the EUR/USD exchange rate. However, one crucial part remains unchanged: they continue to expect a much stronger EUR/USD around the turn of the year, still around 1.14.

"Is it our Westphalian stubbornness that makes us stick to our forecast, even though the exchange rate has weakened significantly since mid-July? Not really! The reasons that led to prices above 1.12 last month were weak. I recently spoke of "good" and "bad" reasons for EUR/USD strength in this space, to distinguish the motives of our forecast from the motives of the market. The fact that the "bad" reasons are being priced out again does not shock us," analysts said.

What are these "bad reasons"? Much of the FX market's valuation of the two currencies revolves around the question of the "terminal rate", i.e. the peak of the respective interest rates in the current interest rate cycle.

"Will the Fed hike again? The ECB? In the coming weeks, strong US data relative to the euro area is likely to suggest that the market is pricing in a higher chance of another Fed hike, which means that the U.S. dollar could look attractive against the euro in terms of the terminal rate. Therefore, the upside potential for EUR/USD is likely to be limited in the short term."

But once everyone has come to terms with the terminal rates of the Fed and the ECB (and it doesn't really matter whether they are ¼ percentage point higher or lower), it will be about something else entirely: how the central banks behave afterwards.

"And, in our scenario, the ECB looks quite attractive from this perspective by the end of the year at the latest. According to the economic forecasts of our economists, the period of economic weakness in the eurozone will come to an end towards the end of the year."

If - "as our ECB watcher suspects" - the ECB has stuck to the "terminal rate" until then, no one can seriously expect rate cuts. Risks to the EUR should then be seen as low.

At the same time, our U. economists expect a significant economic slowdown in the US from then on, to which the Fed - unlike the ECB - will respond with rate cuts. From a market perspective, the ECB is likely to be perceived as a much more hawkish central bank. And that should translate into EUR-USD strength in the FX market.

"But what about the longer term? On a very fundamental level, we do not believe that the perception of a hawkish ECB is justified. Ultimately, for the FX market to evaluate a central bank, we need to look not only at its interest rate policy, but also at whether that interest rate policy is likely to keep inflation sufficiently stable at sufficiently low levels over the medium to long term. Our ECB watchers do not believe that the ECB will be successful in this regard over the medium to long term."

"We therefore continue to expect a weaker EUR/USD exchange rate in second half of 2024, but only then and not earlier. Only then should the period of economic weakness in the US economy come to an end, and only then should it become foreseeable that the Fed's interest rate cuts will be phased out in the foreseeable future. At the same time, if it becomes clear that keeping ECB interest rates at the "terminal rate" is not enough to dampen medium to long-term inflation risks, the ground should be prepared for the EUR/USD to weaken again."