The Eurozone economy is weakening, and the only effective solution is to implement lower interest rates to save it from a collapse. The ECB should stop following the Fed’s actions, as this approach is likely to result in a deeper decline in the EURUSD pair. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Central banks are repeating the Fed’s actions.
- An ECB pause will cause problems for the eurozone.
- The USD index is on track for its best performance since 2015.
- The EURUSD pair may reach 1.3 and slump to parity.
Monthly US Dollar Fundamental Forecast
The US dollar is poised to demonstrate its strongest yearly performance since 2015, having gained more than 7% against major global currencies. The USD index rally is underpinned by the robust performance of the US economy, which has enabled the Fed to implement a less extensive monetary easing cycle than initially expected. As a result, interest rates in the US will remain higher than those in the eurozone, pushing the EURUSD pair to parity.
Major Central Banks’ Interest Rates
Source: Wall Street Journal.
Central banks tend to act in unison, with the strongest — often the leader — leading the way. As a rule, the US Federal Reserve is the leader. However, in a context where GDP growth rates vary, following the Fed’s lead might have adverse consequences for lagging economies. While the US economy has demonstrated resilience in withstanding the most stringent monetary restrictions in decades, thanks to fiscal stimulus and productivity growth fueled by AI technology, the eurozone has suffered more significantly.
US, EU, and UK GDP Growth
Source: Wall Street Journal.
Contrary to the United States, Europe has not yet regained its pre-pandemic GDP growth trajectory due to less generous fiscal stimulus, lower productivity, and the conflict in Ukraine and the related energy crisis. The currency bloc’s economies have coped less effectively with high interest rates than the US economy, and the eurozone GDP is likely to show zero growth in the second half of the year.
In such circumstances, the attempt to keep up with the Fed, which intends to pause in January-March, is ill-advised. Bank of Austria Governor Robert Holzmann suggests that the European Central Bank will need more time to cut rates again, as energy prices tend to rise and a weaker euro stimulates inflation.
If the ECB continues to follow the Fed, eurozone economies are unlikely to meet the IMF’s 2025 forecasts, which are significantly lower than that for the US economy. The situation is exacerbated by Donald Trump’s fiscal stimulus, which is aimed at accelerating US GDP, while trade tariffs seek to slow down foreign economies.
IMF Forecasts for Major Economies
Source: Bloomberg.
The situation can only be resolved through a more rapid ECB rate reduction than the Fed’s, which will result in the EURUSD pair reaching parity within the next 1-3 months.
Monthly EURUSD Trading Plan
The primary concern in this scenario pertains to the execution of Donald Trump’s election pledges, which have been met with skepticism. The market, influenced by the surge in support for the Republican Party, had largely factored these aspects in EURUSD quotes. Should these pledges not be fulfilled, there will likely be a pullback, which could present an opportunity to sell the EURUSD at 1.03 and 1.
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.
