Deutsche Bank expects EURUSD to rise to 1.1 by the year-end

The EURUSD pair might reach the level of 1.1 even if no significant changes in the current geopolitical environment happen. This opinion is shared by Alan Ruskin and George Saravelos from Deutsche Bank. From their point of view, this is possible under the condition that the Fed makes a mistake of easing its monetary policy in the second half of 2023, while the European Central Bank continues raising borrowing costs.

As they stated in a note to clients, such an asymmetry of monetary policies might become a sufficient basis for the EURUSD pair to get stronger and reach the level of at least 1.1 by the end of the next year even without any changes in geopolitical context.

On the flip side, there is a low probability of the dollar being able to hit new highs with no risks to come, including the ones that have occurred this year, with the Federal Reserve's rate hovering around 5%. This is a level Deutsche Bank sees as likely, being close to current market projections. The dollar could rise to new highs, if the Fed hikes the rate to 6% or more. Although, Deutsche Bank believes this scenario is unlikely.

Meanwhile, Raskin and Saravelos believe there is also a chance of a significant recovery in the yen if the Bank of Japan changes its policy. The Japanese national currency is now being tempered by the central bank's stance of maintaining an ultra-soft monetary policy. So far, the yen has weakened to record lows over several decades, prompting the government to intervene in the markets and support the national currency for the first time in 24 years.

Deutsche Bank says that the upward inflation trend in Japan is likely to trigger changes in yield curve control policy. This would lead to a 5-10% fall in the USDJPY in the short term. Therefore, this could affect the value of several currencies, showing strong positions in 2022 due to so-called "carry trades" being funded by lower-yielding currencies. The yen is also included in the list.