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Gains may prove difficult to sustain.

A gradual recovery in consumer spending is unlikely to fully offset other structural impediments to growth in the euro area. The energy shock unleashed by the Russia-Ukraine war has rendered many heavy manufacturing industries non-viable, and an easing in demand from China will weigh on the export sector for years to come. The lagging impact of this year’s monetary tightening efforts might hollow out activity among the region’s once-thriving middle market businesses. And the bloc’s overall fiscal stance is projected to turn contractionary as Next Generation EU grants fail to compensate for the expiration of remaining pandemic- and energy-related measures.

We think European equities and bond markets will continue to trade at a sharp discount to their US equivalents, helping cap upside in the common currency. After an mid-2024 rally, we expect the exchange rate to turn in an underwhelming performance, ending the year only modestly stronger against the dollar.

Estimated EURUSD Expiration Range by Confidence Interval

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Higher for (even) longer