The EUR/USD exchange rate is under pressure, potentially nearing parity due to differing monetary policy paths between the Federal Reserve and the European Central Bank (ECB). Traders are pricing in a substantial reduction of 113 basis points in ECB rates this year, contrasting with the Federal Reserve’s anticipated pause in its easing cycle in January.
In Monday’s early Asian trading, the EUR/USD slipped slightly after recent gains, hovering around 1.0300. Today, market participants will be keenly observing the release of the Eurozone’s HCOB Composite Purchasing Managers’ Index (PMI) and Germany’s preliminary Consumer Price Index (CPI), which could offer further direction.
The euro is facing challenges as analysts foresee potential downward pressure on the currency, driven by the contrasting policy trajectories of the ECB and the Fed. ECB officials are currently inclined to sustain the pace of monetary easing, with markets already factoring in a 113 basis point cut, equivalent to four 25 basis point reductions over the year. Such expectations underscore worries that inflation in the Eurozone may not meet the desired 2% target set by the ECB.
Yannis Stournaras, an ECB Governing Council member and Governor of the Bank of Greece, mentioned in an interview with Skai Radio last Thursday that the ECB’s main interest rate might decrease to “around 2%” by autumn. This implies potential rate cuts at each of the forthcoming four policy meetings.
Meanwhile, the Federal Reserve appears poised to pause its series of rate cuts at this month’s meeting, following a sequence of three reductions. The latest Fed Summary of Economic Projections, through its dot plot, suggests the Federal Funds Rate could climb to 3.9% by year-end, indicating plans for only two additional rate cuts in 2025.
Fed officials are advising caution in adjusting rates for 2025. Richmond Fed President Thomas Barkin emphasized on Friday that the key policy rate should remain above neutral until there’s stronger assurance that inflation will realign with the 2% goal. Echoing this sentiment, Fed Governor Adriana Kugler and San Francisco Fed President Mary Daly highlighted the intricate task faced by US monetary policymakers as they navigate a slower pace of easing.
In related market developments, the focus on the Consumer Price Index (CPI) data from Germany is particularly significant. Released monthly by Destatis, it tracks the average price shift across goods and services bought by households, serving as the primary gauge for inflation and consumer behavior. A high reading tends to be positive for the Euro, while a low figure could exert additional downward pressure.
