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May 25 - 02:55 PM

EUR: Chart: Higher 'Natural' Interest Rates In Europe Could Strengthen EUR/USD Beyond 1.30 Long-Term - SocGen

By eFXdata  —  May 25 - 01:30 PM

Societe Generale (SocGen) states that 'natural' interest rates can provide insights into how currencies might behave under equilibrium conditions. When one country has a higher natural rate than another, it is likely to have a strong currency when both economies maintain neutral monetary policy and stable inflation.

According to the bank, recent estimates from the New York Fed suggest that Europe's natural (real) interest rate has risen from 38 basis points in mid-2020 to 83 basis points now, while the US rate has fallen from 0.9% to 0.7%.

Although SocGen does not expect this to boost the euro in the short term, it raises the possibility that when (or if) the Federal Reserve and the European Central Bank can return rates to a neutral setting, we should see ECB rates move higher than Fed rates. This situation hasn't occurred since 2011.

In that cycle, EUR/USD nearly broke above 1.50. While SocGen considers this level inconceivable at present, they express increased optimism that the EUR/USD could exceed 1.30 again once the war in Ukraine and Europe’s energy issues are resolved.


Société Générale Research/Market Commentary


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