Synopsis:

Morgan Stanley projects a strengthening U.S. dollar against the euro in the coming quarters, driven primarily by shifting inflation dynamics and central bank policy differences between the U.S. and the Eurozone.

Key Points:

• Inflation Influence: The exchange rate between EUR/USD has historically been sensitive to relative core inflation rates in the U.S. and Eurozone. Fluctuations in these rates since 2020 have notably impacted the currency pair's performance.

• ECB's Rate Cut Strategy: Internal discussions within the European Central Bank are focused on the frequency of rate cuts after an expected initial reduction in June. A market shift towards expecting more aggressive ECB rate cuts could strengthen the USD's position.

• Expected Shifts in Market Pricing: As core inflation rates in the Eurozone decrease, this is likely to alter expectations around central bank policies, potentially favoring the U.S. dollar and exerting downward pressure on EUR/USD.

Conclusion:

Morgan Stanley's analysis suggests a bearish outlook for EUR/USD over the medium term.