EUR/USD Forecast: ECB Set to Cut Rates Faster than Fed
The Euro’s Struggle Against the Dollar
The euro is expected to face challenges against the dollar due to weaker economic growth and a faster pace of deflation in the European Union. This could lead to the European Central Bank implementing more aggressive rate cuts compared to the Federal Reserve.
Morgan Stanley’s Analysis
Morgan Stanley predicts a decline in EUR/USD, citing factors such as a faster pace of deflation in the EU and slower economic growth. The deceleration in European inflation is anticipated to outpace that of the US, prompting the ECB to signal quicker rate cuts than currently anticipated.
Market Expectations
The likelihood of an ECB rate cut as early as June increased following the Swiss National Bank’s unexpected rate reduction. Market swaps now indicate a 90% chance of an ECB rate cut by June, with multiple cuts already priced in.
US vs. EU Growth
The disparity in economic growth between the US and EU may influence the Fed to maintain higher rates compared to previous cycles. On the other hand, other central banks like the ECB might need to cut rates further, maintaining a carry advantage for the USD over the EUR.
Geopolitical Factors
Slower growth outside the US and ongoing geopolitical risks could support a stronger dollar, especially as the US elections draw nearer. Morgan Stanley suggests that these factors might contribute to a more robust USD in the near future.
