Foreign exchange forecasters at Berenberg expect the Euro to US Dollar (EUR/USD) exchange rate to appreciate toward 1.1010 in the near-term view.
The pair is expected to trade within a range of 1.0850 to 1.1090 range, with a target of 1.1010.
At the time of writing, EUR/USD is quoted at 1.08733, a 0.38% decline on the day's opening levels.
Arne Christian Rahner, the Head of Financial Markets at Berenberg pinpoints the European Central Bank's (ECB) stance on inflation, highlighted in the ongoing central banking forum in Portugal, as a significant determinant of the euro's short-term performance.
"ECB President Christine Lagarde has already made it clear that euro area inflation is too high to remain at this level for too long", says Arne Christian Rahner, Head of Financial Markets at Berenberg.
He adds, "wage growth is now putting inflation under pressure, which among other factors could prompt the ECB to raise interest rates into a sufficiently restrictive zone to allow for monetary tightening."
A crucial indicator to watch, according to Rahner, is the upcoming Eurozone inflation and unemployment figures due for release.
These figures could either weaken the Euro if inflation reduces pressure on the ECB, or strengthen it if inflation exceeds consensus, supporting the ECB's rate hike plans.
Moving onto the medium-term outlook, the analyst's Euro to Dollar rate target is 1.0900.
Central banks' policy actions play a substantial role here, with the market now factoring in a 77% chance of a 25-basis point Fed interest rate hike in July.
Simultaneously, Berenberg's economists expect the ECB to raise its deposit rate by 25 basis points to 3.75% in July. "Jerome Powell has made it clear that there is still work to be done if the Fed is to reach its 2% inflation target", says Rahner.
He adds, "there is still some uncertainty about how the ECB will proceed after its July meeting, even though Christine Lagarde has continued to signal further rate hikes in her recent speeches."
Rahner's analysis also recognises geopolitical events as influential factors on the medium-term forecast.
"The ongoing war (frighteningly so) does not seem to have been featured in many of the prominent economic forecasts", says Rahner. He believes that the enduring conflict could continue to bolster the US dollar's appeal as a "safe haven" currency.
On the political front, Rahner marks the re-election of Kyriakos Mitsotakis in Greece as an important event, signalling voters' willingness to reward policymakers for making hard but necessary decisions to drive their economies forward.
Looking at the long-term EUR/USD exchange rate forecast, the strategist sets the target at 1.1200, pointing out the potential relief in the markets with euro rates above 1.10 if the risk scenario with gas shortages and a severe recession does not materialise.
Rahner expects that the upcoming US presidential elections in 2024 could spur the Fed to revert to a more expansionary monetary policy, thereby weakening the US dollar.
Rahner also believes that the long-term trajectory of the euro will be influenced by how Europe uses its time to prepare for upcoming challenges. "In the long run, the trend in the euro exchange rate will likely depend on how Europe uses the spring of 2023 to prepare for the next winter", says Rahner.
The strategist observes the potential for inflation to help ease public finances, as debts become worth less and higher prices for goods increase the VAT burden.
Rahner further notes that higher wage increases would continue to drive up prices for wage-intensive services.
However, he also cautions that increasing government commitments, like the gas price brake in Germany and mortgage loan support in Spain, could continue to burden government debt.
"The gas price brake in Germany and the support for millions of households in Spain regarding mortgage loans ('interest rate brake') are just two examples of how government debt will be burdened in the coming years", Rahner states.
The analyst underscores the fact that the overall economic environment has improved significantly.
"In uncertain times, investors seek safe havens like the US dollar. If no new catastrophes drive investors into the US dollar in 2023, the prospect of a narrowing interest rate differential between the Fed and the ECB could ensure that the euro recovers to 1.12 against the US dollar by the end of this year", he adds.