"Fed's Rate Cuts to Propel USD Decline: How the Easing Cycle Could Boost the Euro - Expert Insights"
The Federal Reserve's latest policy easing cycle, initiated on Wednesday, is poised to weaken the US dollar, which in turn, is expected to bolster the euro, according to a recent UBS strategists' note.
The Fed commenced its easing cycle with a substantial 50 basis point reduction at the September meeting, signaling a trend that is likely to persist through 2025.
Key Points:
- Fed’s Easing Cycle: The Federal Reserve has started reducing rates, with a significant 50 basis point cut in September. Projections indicate another 50 basis points of cuts over the remaining meetings of the year, aligning with a total forecast of 100 basis points in cuts for 2024.
- Comparative Central Bank Actions: The Fed's easing is noteworthy as it began later and from a higher rate level compared to other G10 central banks. UBS strategists predict the Fed will continue to reduce rates more aggressively than its G10 counterparts, diminishing the yield advantage that has historically bolstered the USD.
- Impact on USD: As a result of these anticipated rate cuts, UBS expects the current overvaluation of the USD to decline over the coming months and quarters.
- ECB Movements: Concurrently, the European Central Bank (ECB) cut its policy rate by 25 basis points in September, meeting market expectations. Despite speculation of a further rate cut in October, ECB President Christine Lagarde dismissed such notions, suggesting a more measured approach of a 25 basis point cut each quarter.
- EURUSD Forecast: UBS projects the EURUSD pair to rise, having already entered the 1.10-1.15 range. They foresee the pair inching higher, potentially surpassing 1.15 by 2025. After breaching the 1.10 resistance level in August, this has now become a support level, with 1.13 and 1.15 identified as key resistance points to watch.
Analysis: How This Affects You
Understanding the Basics:
- Federal Reserve (Fed): The central bank of the United States.
- European Central Bank (ECB): The central bank for the eurozone.
- Basis Points: A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument.
What’s Happening?
- The Fed is reducing interest rates, making the USD less attractive for investors seeking higher yields.
- This reduction is expected to weaken the USD, while the euro is likely to strengthen in comparison.
How Could This Impact Your Finances?
- Exchange Rates: If you’re planning to travel to Europe or engage in any transactions involving the euro, you might get more value for your money as the euro strengthens against the USD.
- Investments: A weaker USD could impact US-based investments differently than those based in euros. Diversifying your investment portfolio might be a wise consideration.
- Import/Export: Businesses involved in import/export between the US and Europe could see changes in costs and pricing due to currency fluctuations.
Bottom Line:
The Fed’s ongoing rate cuts are likely to weaken the USD, making the euro stronger. This shift can influence your travel plans, investment strategies, and business operations. Staying informed and adapting to these changes can help you capitalize on the evolving financial landscape.