Recent US macro data suggests that the Fed may gradually normalize monetary policy towards a more neutral stance. In the euro area, recent data indicate clear signs of weak growth momentum and modest labor market dynamics. With inflation data easing, headline inflation fell below 2% for the first time in three years, ECB Dansk Bank’s FX analysts note a more rapid move towards a neutral policy stance.
The USD rally may stall towards the end of the year
“We expect the Fed to cut 25bp at each meeting until June next year. Likewise, we expect the ECB to implement back-to-back 25bp cuts until the summer of 2025. If our expectations – which are below consensus for both the Fed and the ECB – are correct, then monetary policy can only help stabilize EUR/USD By the end of the year, however, there is unlikely to be a significant impact in the long term.”
“We maintain a bearish medium-term view on EUR/USD, expecting the cross to gradually decline towards 1.01 on the 12M horizon. The US election results reinforce our bearish outlook, given the expected growth and inflation policy in the US, and with expectations of relatively strong US growth dynamics compared to the euro area next year.”
“In the near term, however, we believe that markets may become overly volatile regarding the Fed’s pricing, and with risks to cyclical U.S. growth. perspectiveThe USD rally may stall towards the end of the year. Significant weakness in the US economy poses a risk to our forecast, as does a significant improvement in the euro zone economy, potentially supported by a rebound in the fragile global manufacturing sector.”
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