EUR/USD has further upside potential - Commerzbank

On Thursday afternoon, the US President once again criticised one of his favourite targets, the Chairman of the Federal Reserve, Jerome Powell. Having criticised the Fed chief at every opportunity in recent weeks, and having most recently called for a 100-basis-point interest rate cut, Trump went one step further yesterday. He demanded an initial interest rate cut of 200 basis points to reduce the US government's refinancing costs, labelled Powell a 'numbskull', and threatened to 'force' interest rate cuts if necessary. His simultaneous assertion that he would not dismiss Powell -- despite stating that he did not see the problem with doing so -- was hardly convincing, Commerzbank's FX analyst Michael Pfister notes.

EUR/USD to trade at 1.16 by the end of 2025

"Essentially, he has provided further justification for our recent change to the forecast. When we last adjusted our EUR/USD forecast in April, we assumed that the EUR-USD exchange rate would trend higher over the next year and a half, following a brief period of USD strength. This was due to the uncertainty surrounding US trade policy and the growing likelihood that the US dollar would be the weak link in the US administration's efforts to achieve a balanced current account deficit. We were essentially correct in this view, but the market had simply anticipated the move in view of the increasingly erratic trade policy."

"However, despite the upward movement that has already taken place, we think that the reasons for higher EUR/USD levels remain valid. Even after reaching agreements with other countries, Donald Trump has repeatedly threatened to impose new tariffs shortly afterward. While it is unlikely that Trump will dismiss Fed Chairman Jerome Powell before the end of his term, he may nominate a Fed chairman more in line with his views next year. The prospect of a turnaround in monetary policy, including significant interest rate cuts, combined with erratic trade policy and general uncertainty surrounding US investments makes us think that the US dollar will face tougher times in the coming months."

"Conversely, our economists expect the German fiscal package to provide a significant boost in the coming year. After many years of struggling, this should encourage investors to take a closer look at the euro area again, which should benefit the euro. Taking these factors into account, we have revised our EUR/USD forecast higher, now expecting a level of 1.16 by the end of 2025 and 1.20 by the end of 2026."