Economists at Société Générale suggest that markets are currently factoring in three 25 basis points rate cuts by both the Federal Reserve and the European Central Bank (ECB) throughout the year. This expectation is keeping the EUR/USD rate range-bound.
A big EUR/USD rise is very unlikely now
The current market sentiment suggests an anticipation of three 75 basis points rate cuts from both the Federal Reserve and the European Central Bank (ECB) throughout the year. What holds significance is the evolution of these expectations and how policy expectations for 2025 shape up.
At present, the EUR/USD pair is slightly more inclined to inch upwards than to experience significant declines. This is attributed to the gradual synchronized easing, which diminishes the attractiveness of the US dollar. However, a substantial rise in EUR/USD is deemed highly improbable at the moment, as it would necessitate a considerably greater easing from the Fed compared to the ECB.
Conversely, the risk looking into 2025 is that the Fed might commence tightening measures once again, long before the ECB does. This scenario would mirror the experience of the Great Moderation era, where rate cuts in 1995 were reversed in 1997, and those in 1998 were subsequently reversed in 1999/2000. Interestingly, this period coincides with the last instance when the Dollar traded at its current levels in trade-weighted terms.
