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The Euro's recent pullback from highs near $1.12 is no surprise to analysts at Commerzbank who reckon further near-term softness is justified, but the bank says it is sticking with forecasts that show a robust recovery by the time the new year is upon us.

A new research note from the German bank says a pullback below 1.10 in the Euro to Dollar exchange rate (EURUSD) is warranted by the lay of the fundamental landscape and further losses can be expected given central bank dynamics.

"The reasons that led to prices above 1.12 last month were weak," says Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

"In the coming weeks, strong U.S. data relative to the euro area is likely to suggest that the market is pricing in a higher chance of another Fed hike," he adds, "which means that the U.S. dollar could look attractive against the euro in terms of the terminal rate."

A string of above-consensus economic data prints points to stubborn resilience in the U.S. economy that has raised confidence amongst analysts that the Fed can both bring down inflation while avoiding an economic recession.

These expectations have lifted the odds of a further rate hike in September, aiding Dollar exchange rates in the process.

But Leuchtmann says there is little fodder left for currency markets in the rate hiking story: both the ECB and Fed are close to reaching a terminal interest rate and changes by a few basis points here or there are not game-changing.

What is important, however, is what happens next: who cuts interest rates first and by how much?

Commerzbank economists see the period of economic weakness in the Eurozone coming to an end towards the end of the year.

This lowers the odds of the ECB cutting interest rates meaning "risks to the EUR should then be seen as low," says Leuchtmann.

At the same time, Commerzbank's U.S. economists expect a significant economic slowdown in the U.S. from then on, to which the Fed will respond with rate cuts.

"From a market perspective, the ECB is likely to be perceived as a much more hawkish central bank. And that should translate into EUR-USD strength in the FX market," says Leuchtmann.

Commerzbank forecasts Euro-Dollar near current levels through September ahead of a move to 1.14 by year-end and 1.15 by the end of the first quarter of 2024.

Levels around 1.15 are however likely to be a peak and a steady decline through the second half of next year is envisaged as the U.S. economy recovers from its expected slump.