As the Federal Reserve and foreign central banks become more active over the next few quarters, Wells Fargo economists believe that differences in monetary policy will become increasingly important to the performance of currencies during that period. Subsequently, they predicted the EUR/USD at 1.05 and USD/JPY at 123.00 by early 2023.
Monetary policy divergence will be very important for the euro and the yen
“So far, the ECB sees the price spike as temporary and has expressed less concern about inflationary pressures than most other major central banks. This is reflected in the December ECB’s monetary policy announcement, which also gave no indication that policy rates will rise in the short term. This divergence between the ECB’s policy outlook and a faster acting Federal Reserve supports our forecast for a weaker euro and EUR / USD falling to 1.05 in early 2023. “
“We expect the Bank of Japan’s monetary policy to remain stagnant for the foreseeable future. As the Fed adjusts policy and US bond yields rise over time, we are targeting a USD / JPY exchange rate at 123.00 by early 2023. “
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