Morgan Stanley Global FX Strategy Week Ahead for: Euro, Dollar, Yen, Pound, Franc, Australian and New Zealand Dollars - Pound Sterling Live

What the desk is arguing

The desk frames this as an opportunity for traders to capitalize on continued Euro weakness against the Dollar, suggesting that the cross could challenge the 1.05 level soon. This sentiment is reinforced by the anticipation of a prolonged tightening cycle from the Fed, with market participants pricing in additional rate hikes. Furthermore, recent GDP readings from the U.S. have outperformed those from the Eurozone, indicating a clearer divergence in economic trajectories between the two regions.

Supporting this bearish outlook, the recent inflation data has shown a persistent trend, with U.S. CPI rising to 4.9% year-over-year, compared to the Eurozone’s 7.0%, which adds to the narrative of the Fed retaining a hawkish stance. Market positioning is also leaning towards this bearish sentiment, as futures markets reflect an expectation of continued Fed rate increases while the ECB remains cautious due to various economic headwinds.

The alternative read would be a surprise shift in ECB policy if inflation metrics unexpectedly increase, prompting aggressive actions to narrow the interest rate gap with the Fed.

Where it sits in our coverage

Our consensus target for the EUR/USD is set at 1.075, with a range spanning from 1.04 to 1.12. Notably, jpmorgan has a target of 1.10 for March 2026, signaling alignment with the desk’s bearish view. In contrast, bofa sets a lower target of 1.04 for the same horizon, indicating a divergence in expectations about Euro performance.

This view places the desk's forecast towards the middle of market expectations, reflecting a moderate stance that aligns closely with jpmorgan, while being more optimistic than bofa's more bearish outlook.

How other firms see it

Several firms, including jpmorgan and citi, appear aligned with this bearish sentiment on the Euro, forecasting further declines against the Dollar. Conversely, bofa and ubs offer a more cautious perspective, with estimates reflecting potential stabilizing action in the Euro, suggesting different interpretations of the macroeconomic landscape.

As we monitor the unfolding economic dynamics, keep an eye on related pairs like USD/JPY and EUR/GBP, which may experience spillover effects based on the Dollar's strength versus the Euro and broader G10 moves.