EUR/USD Forecast: Higher Range Expected through 2025
Leading FX analysts at DBS, Philip Wee and Chang Wei Liang, predict that the EUR/USD currency pair is set to enter a higher range of 1.10-1.15 by the year 2025. This projection is based on a detailed analysis of the policies and actions of the European Central Bank (ECB) and the Federal Reserve (Fed).
The ECB vs. Fed: Diverging Paths
- The ECB is unlikely to follow the Fed’s lead in lowering interest rates aggressively. As of September, the ECB’s deposit facility rate was 150 basis points above its 2% inflation target, while the Fed’s rate was in the range of 275-300 basis points.
- The ECB has identified an inflation-adjusted neutral rate of 1-2%, which is higher than the Fed’s range of 0-1%. This difference in neutral rates is a key factor driving the diverging monetary policies of the two central banks.
Rationale Behind ECB’s Easing
The ECB’s decision to ease monetary policy is primarily driven by its expectation of a slowdown in inflation despite record-low levels of unemployment. The central bank believes that preemptive action is necessary to prevent a deflationary spiral and support economic growth in the Eurozone.
Fed’s Focus on Labor Market
In contrast, the Fed’s rate cuts are aimed at sustaining the momentum in the labor market and preventing any further cooling. The central bank considers a strong labor market essential for achieving its inflation target and overall economic stability.
Analyzing the Impact on EUR/USD
Understanding the diverging paths of the ECB and the Fed provides valuable insights into the future movements of the EUR/USD currency pair:
- The ECB’s cautious approach to rate cuts may support the euro against the dollar, leading to a higher range for the EUR/USD exchange rate.
- Conversely, the Fed’s focus on labor market dynamics and inflation targeting could put downward pressure on the dollar, potentially narrowing the gap between the two currencies.
Investors and traders should closely monitor the policy decisions and economic indicators from both central banks to stay ahead of potential shifts in the currency markets.