EUR/USD: Limited scope to advance in H1 – MUFG

FXStreet Insights Team FXStreet

Economists at MUFG Bank highlight EUR upside limits.

Weak growth and a faster drop in inflation and ECB rate cuts to weigh on EUR

Inflation has dropped markedly in the Eurozone. Weak economic data and looser labour markets than in the US will see ECB concerns over inflation ease in the coming months. Weak growth in Germany will persist, not helped by the increased fiscal constraints. A turn in the global inventory cycle & lower inflation should see better growth in H2 vs H1 next year.

The ECB is likely to commence cutting its key policy rate in Q2 2024, around the same time as the Fed. We believe this leaves limited scope for EUR/USD to advance in H1 but market participants may then reduce expectations of the extent of ECB rate cuts versus the Fed as the Eurozone economy improves and German manufacturing picks up moderately. We see the Fed cutting by more than the ECB next year implying a mis-pricing in OIS markets.

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