Danske Bank has revised its EUR/USD forecast upward, citing a significant change in underlying structural factors. According to FX Analyst Frederik Romedahl, the revision reflects improved sentiment stemming from European fiscal reforms. The analysis considers real rate parity, relative asset market attractiveness, and global monetary conditions.
The probability of a US recession in 2025 has increased, currently priced at approximately 60% in prediction markets. This heightened risk, coupled with potential policy implications under a Trump administration, negatively impacts the long-term US growth outlook. Policies aimed at restricting immigration, reducing federal employment, and diminishing productivity are projected to narrow real rate differentials, thereby reducing support for the USD.
Furthermore, preliminary indications suggest a capital rotation away from US assets. Should this trend become structural, particularly involving a shift away from the US technology sector, it would represent a departure from the prevailing investment narrative of the past decade, with adverse consequences for the USD.
While European fiscal reforms are contributing to improved sentiment, the primary driver of the revised outlook is the increasing uncertainty surrounding US politics. The growing divergence between the US and its allies, along with global institutions, is perceived to be elevating the relative risk premium on US assets, which is expected to exert downward pressure on the USD over time. Consequently, Danske Bank’s revised EUR/USD forecast projects the pair to trade at 1.11 in one month (previously 1.09), 1.12 in three months (previously 1.08), 1.14 in six months (previously 1.07), and 1.14 in twelve months (previously 1.06).
