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The US dollar is more likely to be driven by real than by nominal interest rates in the months ahead, and the Federal Reserve seems intent on keeping real interest rates negative for longer, argue analysts at the National Bank of Canada.They forecast EUR/USD at 1.24 by the end of the fourth quarter and at 1.19 in about a year.  

Key Quotes:

“The broad index of USD strength rose for a third straight month in March. This latest bout of appreciation came mostly from gains against the currencies of other developed economies. It can probably be attributed to speculators covering bearish positions on the greenback after Washington signalled another fiscal stimulus package, leading market participants to see increased odds of higher U.S. interest rates. In our own outlook, the Fed seems intent on keeping real interest rates negative for a while longer and, to this end, will not taper its quantitative easing anytime soon. Our scenario remains one of USD depreciation in 2021 as real interest rates are kept negative.”

“Mr. Powell’s statement accords with our own current view that U.S. quantitative easing and negative real rates will be with us for the foreseeable future in order to keep financial conditions pro-growth. This backdrop, together with a swelling twin deficit (current-account and fiscal), argues for renewed USD weakness in the months ahead.”