Rate expectations as one of the last hopes for a trend reversal in EUR/USD – Commerzbank

Anyone hoping that the data would allow EUR/USD to move higher was bitterly disappointed on Friday. The first estimates for both the UK and euro area PMIs were much worse than expected, while the US PMIs surprised to the upside. Leading indicators continue to point to completely different worlds on both sides of the Atlantic, and worse, the data seems to be diverging even further. It is therefore not surprising that EUR/USD briefly fell below 1.04 on Friday, Commerzbank’s FX analyst Michael Pfister notes.

Interest rate expectations are one of the last hopes for a EUR/USD turnaround

“It is not just the case that the expected economic policies of a Trump administration will increase the outlook for US growth and inflation in the near future. Rather, Friday's figures showed once again that the US already has a significant growth advantage, with the risk that this will increase. Given the combination of Trump and the already strong figures, the market is now pricing in just over 50 basis points of rate cuts by October 2025.”

“There is now a not so small case for the Fed to pause on rate cuts in December. On the other hand, Jerome Powell made it very clear at the last meeting that they will only analyze the impact of the new Trump administration when plan are put into action. Until then, they will continue as before. And despite the surprisingly strong September jobs report, the underlying trend is still pointing downwards. In addition, the Fed is likely to be more inclined to cut rates again in December to avoid the impression that it is doing so just to help one side in the election campaign.”

“In addition to US interest rate expectations, expectations for the euro area are also encouraging. The market is now more inclined to expect a big move in December, i.e. a 50bp cut has become more likely in recent weeks. Here, too, our economists see a 25 basis point move as more likely. This is especially true in view of Friday's inflation figures for November, which are expected to show a further increase. In short, interest rate expectations are currently one of the last hopes for an imminent turnaround in EUR/USD.”