In light of the differing growth rates in the US and eurozone economies and the varying pace of monetary expansion by the Fed and ECB, the most favorable outcome for EURUSD bulls would be a correction. Let us discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Markets expect the fed funds rate to fall to 3.5%–3.75% in 2025.
- The ECB may cut rates by 50 bps at one of its next meetings.
- The divergent pace of monetary expansion is dragging the euro down.
- The EURUSD pair may slide to parity within six months.
US Dollar Fundamental Forecast for Six Months
The foreign exchange market is dull as investors await the release of US inflation data and the outcome of the ECB meeting. The US dollar is supported by the growing demand for safe-haven assets due to the events in South Korea, Syria, and France. China has buoyed the euro, intending to switch from a cautious monetary policy to a moderately accommodative one. The anticipation of Beijing’s new stimulus measures has contributed to a rise in risk appetite, preventing a significant decline in the EURUSD currency pair.
The divergence in economic growth and monetary policy, which widened further after Donald Trump’s victory in the US presidential election, serves to reinforce the downtrend in the major currency pair. The implementation of fiscal stimulus should provide a boost to the US economy, while trade duties are expected to have a cooling effect on the eurozone.
In a robust economic climate, inflationary pressures tend to be elevated as well. Therefore, it is unsurprising that the derivatives market has reduced the perceived scope of the Fed’s monetary expansion. Market expectations are for three cuts in the federal funds rate in 2025, with a fourth cut also not ruled out. Given the December cut, this would bring borrowing costs down to 3.5%–3.75%.
Market Expectations on Fed Funds Rate
Source: Wall Street Journal.
In Europe, the situation is different. Despite calls from ECB officials for a gradual easing of monetary policy, market sentiment suggests that the Governing Council may opt for a more immediate reduction of 50 bp in the deposit rate at its upcoming meeting.
Bloomberg experts anticipate that the ECB will implement a 25 bp cut at each meeting until June, reducing the cost of borrowing to 2%. The derivatives market points to a potential decline to 1.75%. Citi projects a figure of 1.5%, citing the estimated impact of Donald Trump’s protectionist policies in the second half of 2025. This, they believe, will make a pause by the ECB unlikely.
Market Expectations on ECB Rate
Source: Bloomberg.
As might be expected, there is considerable divergence in the positions held by speculators. While asset managers reduced their bearish bets on the US dollar by 50% during the week and hedge funds increased their net long positions to their highest levels since October, the picture is different for the euro. Financial managers reduced their net bullish positions on the single currency from the May peak of $64 billion to $23.4 billion, while leveraged funds increased net shorts to $8.5 billion.
Speculative Positions on US Dollar
Source: Bloomberg.
EURUSD Trading Plan for Six Months
In such a situation, the most prudent course of action for EURUSD bulls is to expect a correction. In order to reverse the downtrend, the US economy should deteriorate sharply, coupled with an unexpected acceleration in European GDP, which is unlikely. A more probable scenario is that the divergence will continue to expand. Against this backdrop, the euro will likely decline to 1.05, 1.03, and parity in one, three, and six months, respectively. The recommendation is to sell.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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