Recent US macro data suggests that the Fed can gradually normalize monetary policy toward a more neutral stance. In the euro area, recent data indicates clear signs of weaker growth momentum and moderating labour market dynamics. Coupled with easing inflation data, with headline inflation declining below 2% for the first time in three years, the pressure on the ECB to move more quickly toward a neutral policy stance has increased, Danske Bank’s FX analysts note.

USD rally can stall toward year-end

“We expect the Fed to deliver a 25bp cut at each meeting through June of next year. Similarly, we anticipate the ECB to implement back-to-back 25bp cuts until summer 2025. If our expectations – which are below consensus for both the Fed and ECB – are correct, monetary policy alone could help stabilize EUR/USD toward year-end but is unlikely to have a notable impact over the longer term.”

“We maintain a bearish medium-term view on EUR/USD, expecting the cross to gradually decline toward 1.01 over a 12M horizon. The US election outcome reinforces our bearish outlook, given anticipated pro-growth and inflationary policies in the US, along with our expectation of relatively stronger US growth dynamics compared to the euro area in the coming year.”

“In the near term, however, we believe markets may have become overly hawkish on Fed pricing, and with downside risks to the cyclical US growth outlook, the USD rally could stall toward year-end. Significant weakness in the US economy poses a risk to our forecast, as does a marked improvement in the euro area economy, potentially supported by a rebound in the fragile global manufacturing sector.”