Capital Group, an asset management firm overseeing $3.3 trillion, has stated that the European Central Bank will raise interest rates at least once this year, a move expected to significantly boost the euro against the U.S. dollar.

This outlook contradicts the expectations of many investors and economists, who anticipate the ECB will keep rates unchanged until 2027. Some even predict the central bank might ease policy if the U.S. Federal Reserve, under its new chair, cuts rates and forces the ECB to act. Currently, money markets are pricing in less than a one-third probability of a 25-basis-point rate cut.

However, Edward Harrold, Investment Director at Capital Group, forecasts that accelerating economic growth in Europe will prompt a divergence in policy paths between the ECB and the Fed. In an interview, he stated this would drive the euro into the "high end of the 1.20 range" by year-end. On Friday, the euro was trading around $1.1860.

"One area where we differ from the market consensus is that monetary policy tightening in Europe could occur earlier than expected," Harrold said, citing Germany's plans for increased fiscal spending.

"We anticipate more robust economic growth in Europe and further manifestation of inflationary pressures," Harrold stated. "This could lead the ECB to begin raising interest rates before the end of this year."

"We are clearly more optimistic about the euro compared to the U.S. dollar," he added.

Harrold expects the ECB to raise rates once or twice from the current 2% level. He also believes the Fed's policy path will largely align with market pricing, which suggests two to three rate cuts in 2026. Despite some recent data coming in weaker than expected, there is also a view that the U.S. administration aims to maintain economic momentum ahead of the November midterm elections.

"This implies U.S. rates will move lower, but with inflation remaining persistent, U.S. real yields will decline. Concurrently, we would see European real yields rise," Harrold explained. "This would result in a sustained pattern of euro strength/U.S. dollar weakness."

Currently, the real policy rate in the eurozone is slightly below 0.5%, approximately half that of the United States.

Harrold noted that the outlook for the euro depends on several variables, including the resilience of the U.S. labor market.