In response to increasing inflation risks, the Federal Reserve and the European Central Bank (ECB) have transitioned into a more aggressive policy stance. Economists at Nordea expect the Fed to hike rates to a restrictive level above 4%, while a neutral rate at around 1.75% may be enough for the ECB.

EUR/USD set to move towards parity

“We expect the Fed to hike by 75 bps in July, followed by 50 bps in September and November, and then by 25 bps in December, January and March to end at 4.25% for the upper bound.”

“We forecast a very flat US Treasury curve at 4% from early next year.”

“The ECB is set to follow the signalled 25 bps July rate hike with 50 bps moves in September and October, 25 bps in December and further three times in 25 bps steps in H1 2023.”

“The dollar is expected to keep strengthening as the Fed hikes, with EUR/USD to moving to parity.”