Euro: Downside below 1.10 before 2H27 recovery against US Dollar – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong expect the US Dollar (USD) to stay broadly supported into 1H27, with EUR/USD potentially dipping below 1.10 as AI-related uncertainty and elevated energy prices sustain US growth and inflation premia. However, firmer Asian currency management and fading AI impulse later on underpin a U-shaped EUR/USD profile, with scope for Euro recovery in 2H27 as Fed hawkishness eases.

Dollar firm but not one-way

"These conflicting forces have kept the USD broadly range-bound. AI concerns are challenging the US growth premium, while higher energy prices reinforce inflation risks. At the same time, markets may increasingly question how far the Fed can tighten if AI-related stress leads to a material tightening in financial conditions."

"We still think it is too early to position for sustained USD weakness. AI remains broadly supportive of US growth and the USD, but it is no longer a one-way trade. USD upside should also be more contained, particularly as firmer currency management in China and potentially Japan helps anchor regional Asian currencies."

"We remain constructive on the USD against the EUR into 1H27 and see scope for EUR/USD to slip below 1.10. European tail risks remain unresolved. While Moody’s decision to retain France’s Aa3 rating provided some relief, the negative outlook and lingering fiscal risks should limit the scope for a sustained OAT rally ahead of the 2027 French presidential election."

"Beyond 1H27, we retain our U-shaped EUR/USD profile. As the US AI growth impulse peaks and fades, the hawkish Fed risks that have supported the USD should also ease, creating room for EURUSD to turn higher in 2H27."

"USD should stay supported into 1H27, with EUR/USD potentially slipping below 1.10. But AI uncertainty and firmer Asian FX management should cap USD gains, setting the stage for a EUR/USD recovery in 2H27."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)