Deutsche Bank: Fed’s Powell opens door to aggressive easing, closing EUR/USD quick

Deutsche Bank is keeping its year-end EUR/USD 1.10 for now but says that would change if the Fed cuts by 50 basis points on September 18.

Some highlights from the latest note from Deutsche Bank FX:

• New “Powell put” emerging – market to price 25bps cuts as floor, not ceiling
• Current environment supportive of risk appetite and high-carry EM FX

If the Fed matches the 100 bps priced in for the remainder of this year, such a move would be dollar negative for four reasons:

1. Drop in US real rates
2. Steepening of US real 5s/30s curve
3. Fed leapfrogging other central banks in easing cycle
4. Market pricing even lower terminal rates

For now, they’re waiting for non-farm payrolls and watching how the data develops.

We are keeping our EUR/USD forecast of FX returning below 1.10 by the end of the
year for two reasons. First, because we are not yet convinced the Fed intends to go
down such an aggressive reflationary route. Our House View remains more aligned
with a “gradual, measured” rate cut path outlined by numerous Fed speakers last
week. Second, because the other key macro element of our forecasts remains
intact: US growth exceptionalism.