Euro second fiddle – Commerzbank

The market has been heavily focused on the US dollar (USD) in the recent past. This is not surprising, as we assume that the Fed has a more responsive reaction function, which leads to increased uncertainty and therefore increased volatility, especially at the turning point of monetary policy. The euro is likely to play second fiddle for the foreseeable future, although it is certainly worth taking a look at the single currency, notes Antje Praefcke, FX analyst at Commerzbank.

The 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 “just” 150 basis points. With the Fed’s inflation target within reach and the US labor market weakening, these expectations may seem justified. However, there are unlikely to be any major surprises on the Fed’s interest rate expectations for now.”

“On the euro side, the ECB statements at the September meeting were less precise than Powell’s recent comments. ECB President Lagarde stressed in July that future decisions will depend on the data. However, the ECB saw its medium-term inflation outlook confirmed and Lagarde stressed that wages were unlikely to rise as much next year as they did this year. In addition, some ECB officials have become more dovish, making an interest rate hike next week look very likely.”

“It is quite possible that expectations for the ECB will change somewhat during the release of the eurozone inflation data – especially if the data surprise on the downside – and the euro will depreciate somewhat. The bigger the drop in the inflation rate, the more certain the market can be that the September rate cut will happen as expected and that the ECB will continue its tapering cycle beyond that.”