This is an excerpt from the full 2025 EUR/USD Outlook report, one of nine detailed reports on what to expect next year.
Key points of the Euro 2025 outlook
- The euro is expected to end 2024 with a decline of more than 6.2% – the first reversal in three months and a new year-to-date low
- FOMC outlook lowers expectations for aggressive rate cuts in 2025 – USD bulls control annual cross
- ECB's concerns shift from inflation to growth in 2025 – geopolitical instability, trade war concerns
EUR/USD has fallen nearly 7.9% from its high in just eight weeks, and the euro is poised to end 2024 just off its year-to-date low. This decline could leave the US dollar poised for continued appreciation, with parity levels looming until an open in 2025, and the FOMC signaling a slower pace of interest rate cuts next year.
Federal Reserve Board in the spotlight
In December, the Fed cut interest rates for the third time in 2024 (totaling 100 basis points), but signaled that the pace of rate cuts could slow into 2025. Some would argue that the strength of the US economy calls into question whether there will be further rate cuts. Despite the need for more rate cuts, the central bank continues to signal the possibility of two more rate cuts, and the committee projects the federal funds rate to be 3.9% next year.
The move to the end of the year suggests that the FOMC expects inflation to remain persistent through 2025, potentially limiting the central bank's scope to further normalize interest rates. In fact, an updated summary of economic forecasts showed that both headline and core inflation will increase dramatically next year, with unemployment and growth improving slightly. From an economist's perspective, this forecast highlights an environment in which it is difficult to justify further easing, and if inflation persists, markets will need to further adjust interest rate expectations to benefit the US dollar. There may be.
FOMC Economic Forecast Overview
Source: FOMC
Note that the central bank interest rate dotplot shows that the appropriate level of interest rates through 2025 has increased markedly since the last update in September. The move has accelerated changes in expectations for the first quarter, with federal funds futures now pricing in a 50% chance of a March rate cut.
FOMC interest rate dot plot
Source: FOMC
ECB 2025 outlook is characterized by “uncertainty”
The ECB cut interest rates for the fourth time in December, with President Christine Lagarde pointing out that there is a great deal of uncertainty heading into 2025. With inflation largely expected to return to the central bank's 2% target early next year, the focus has now shifted to downside risks to inflation. Growth has slowed as continued political instability in the eurozone and the growing threat of a new US trade war cloud the outlook for 2025. With further easing expected as early as January, the broader monetary policy outlook currently remains in favor of EUR/USD bears, and the interest rate differential could continue to push the USD higher into next year.
Source: ECB
This is an excerpt from the full 2025 EUR/USD Outlook report, one of nine detailed reports on what to expect next year.
