The Federal Reserve’s monetary policy easing cycle, which began on Wednesday, is expected to weaken the U.S. dollar and, as a result, help the euro advance, according to a note from UBS strategists.
The Fed began its easing cycle with a 50 basis point cut at its September meeting and is expected to continue cutting rates through 2025.
According to the Fed’s dot plot, an additional 50 basis points of cuts are expected over the last two meetings of the year, in line with their forecast of a total 100 basis points of cuts by 2024. The Fed started easing policy later than most other G10 central banks and from a higher rate level.
UBS strategists expect the Fed to cut rates “more aggressively” in the coming months and quarters than other G10 central banks, “thus reducing the USD’s yield advantage, which has been a supportive factor for the currency in recent years.”
“Therefore, we expect some of the current USD overvaluation to fade over the coming months and quarters,” they added.
Meanwhile, the European Central Bank (ECB) cut its key interest rate by 25 basis points at its September meeting, as widely expected.
Ahead of the meeting, there had been speculation that another rate cut would be possible in October, especially given that markets expect the Fed to act at every meeting this year. However, ECB President Lagarde dismissed that speculation, leading markets to downgrade the odds of an October rate cut.
UBS notes that this is consistent with their expectation of a gradual approach from the ECB, involving a rate cut of a quarter of a percent each quarter. This outlook contrasts sharply with the faster pace of easing expected from the US Fed and underlines the bank’s forecast of a rate hike towards 1.15.
“EUR/USD has entered the 1.10-1.15 range, as we expected. We see the pair slowly advancing above 1.15 in 2025,” the note said.
UBS points out that after breaking the 1.10 resistance level in August, it became the new support level in September. On the upside, they identify 1.13 and 1.15 as the key resistance levels to watch going forward.
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