The market has focused heavily on the US Dollar (USD) in the recent past. No wonder, as we assume that the Fed has a more responsive reaction function, which leads to increased uncertainty and thus increased volatility, especially at the turning point in monetary policy. The Euro is likely to play second fiddle in the near future, although it is of course worth taking a look at the single currency, Commerzbank’s FX Analyst Antje Praefcke notes.
Euro is set to depreciate somewhat
“It is clear that the market also expects the Fed to be more responsive. The Fed is likely to cut by a total of 200 basis points by mid-2025, the ECB by ‘only’ 150 bp. In view of the fact that the Fed's inflation target is within reach and the US labor market is weakening, these expectations may seem justified. However, there are unlikely to be any major surprises on the Fed's interest rate expectations for the time being.”
“On the Euro side, the ECB's statements at the September meeting were less precise than Powell's recent comments. ECB President Lagarde emphasized in July that future decisions would be data dependent. However, the ECB saw its medium-term inflation outlook confirmed and Lagarde emphasized that wages are unlikely to rise as much next year as they did this year. In addition, some ECB representatives have become more dovish, making an interest rate hike the week after next appear highly likely.”
“It is quite possible that the expectations for the ECB will shift somewhat in the course of the publication of the Euro zone inflation data – especially if the data surprise to the downside – and the Euro will depreciate somewhat. The greater the fall in the inflation rate, the more certain the market can be that the interest rate cut in September will come as expected and that the ECB will continue its cutting cycle beyond that.”
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