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While recent strong data confirm that the economic recovery in the eurozone is underway, economists at Capital Economics continue to think the euro will weaken against the US dollar this year.

ECB not to raise rates until 2026

“While we expect the economy in the eurozone will continue to recover, our view is that the underlying prospects for growth and inflation there remain less strong than in the US (though this may be obscured by temporary ‘reopening effects’).”

“The strength of economic data in the eurozone compared to the US appears to be feeding through to relative expectations for monetary policy in the two economies, which only recently levelled off even as the euro has continued to strengthen.”

“We think the current pricing of rate hikes in the eurozone relative to the US is stretched – we do not expect the ECB to raise rates until 2026. As a result, we expect the euro to weaken against the greenback as market expectations adjust to reflect the underlying economic prospects for the two economies.”