Will the Euro continue to weaken in the next 3 months (i.e. will it be a good time to travel to Europe)?

My FX Forecast:


Prediction Date: 01/31/2022

Deadline Date: 04/30/2022

Currently 1.12 dollars can be exchanged for 1.00 euro – which has been stable over the last few months, but has trended down significantly from the 1.20 dollars for 1.00 euro range in the summer of the last year.

EURUSD Exchange Rate
Source: TradingView

Exchange rates are typically driven by monetary policy differences. The Fed is looking to quickly end QE and hike interest rates 3-4 times this year. While the ECB is winding down its own QE purchase program, it is continuing its hot money policy, with perhaps one hike forecasted for late this year.

Diverging policies are ultimately driven by economic considerations. In the US, the labor market continue to run hot, and public outcry over a year of increasingly high inflation has alerted Fed officials that they are perhaps behind the curve.

US Inflation, YOY
Source: FRED

In the Eurozone, core inflation is running at 2.6% YOY (higher than its 2% target) and headline inflation running even higher at 5%. However, expectations are for inflation to continue to fade over time, and with the economic recovery running behind the US, the ECB likely will not move as quickly as the Fed to tighten.

US economic recovery outpacing Eurozone
Source: Brookings Institute

Although the EUR / USD rate at 1.12 has dropped quite a bit from the 1.20 highs seen last year, I think that with the Fed still aggressively looking to tighten, there is still substantial room for the EURUSD exchange rate to depreciate.