Dollar Strength Driven by Fed Rate Hike, EUR/USD Forecast to Reach 1.14 by Year-End

The US dollar has gained strength over the past month, driven by a hawkish turn from the Federal Reserve. The central bank's decision to raise interest rates for the first time since 2023, following a strong August jobs report and high inflation numbers, has shifted market views.

According to Nordea, no hiking cycle this century has consisted of just a single move, suggesting that further rate hikes are likely. The US remains the global growth centre, with its dominance in AI investment continuing to attract capital.

Nordea's forecast predicts EUR/USD will reach 1.14 by year-end, down from their previous call of 1.16, and expect it to test 1.12 in H1 2027 before recovering to 1.17 in H2 2027 and 1.21 by end-2028.

However, the dollar-bullish picture could shift as US inflation comes off the boil and servicing US debt becomes a priority. The AI boom may also slow later in 2027 or 2028 due to rising leverage and costs of capital.