Tag: Interest Rates

c The Eurozone currency fell by 0.5% to USD1.0306, a decline of circa 8% since late September 2024. There are a number of factors that have dragged the Euro lower, and experts agree one factor is the eurozone’s export-leaning economies. which will suffer under tariffs as promised by the US President-elect Donald trump. 

Other factors include economic and political uncertainties in Germany and France, whose economies underpin and are the driving force behind the European Union, plus monetary policy discrepancies between the ECB (European Central Bank) and the United States Federal Reserve. Furthermore, recent economic data coming out of France showed the sharpest decline in manufacturing activity since May 2020 whilst data from Germany showed output hitting a three month low. 

The Euro’s slump has driven some analysts to predict that in 2025, the Euro will not only achieve parity with the US Dollar but may well fall below that figure. The last time this key threshold was passed was July 2022, after Russia’s illegal invasion of Ukraine in February of that year. Experts described 2022 as the worst year in the Euro’s history, with the Euro falling under parity In July but reached a year-to-date low on 27^th September 2022 falling to 1 Euro = USD 0.960.

On Thursday 2nd January 2025, the financial markets factored in further energy problems attributed to the eurozone compounding on-going woes for the Euro. Russian gas exports to Europe via Ukraine were halted on January 1^st, 2025, bringing to an end the five year transit agreement with neither side entering into new negotiations whilst the two countries are still at war. Central European countries will now have to find more expensive gas, just as depletion of winter storage is moving at its fastest pace in years. 

A number of commentators have asked if the ECB will intervene to support the Euro, however financial markets are of the opinion that exchange rates are not on the ECB’s radar and therefore are not currently part of ECB policy. Interestingly, The ECB has only intervened to support the Euro a few times, the first was back in 2000 to support the Euro and the second was in 2011 as part of a coordinated effort by the G7* to weaken the Japanese Yen.

    *G7 – Also known as the Group of Seven is an intergovernmental political and economic forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. The European Union has a seat at the table but as a non-enumerated member.

Elsewhere, data released showed hedge funds have held bearish positions on the Euro since the last week of September 2024. It further showed that on the last day of December 2024, circa 2.5 Billion in euro options wagers changed hands targeting parity and below, which was four times more than the previous month. 

This year, analysts predict the ECB will cut interest rates by a full percentage point, whilst the Fed appears to be on a more hawkish stance of 50 basis points for 2025. Many experts agree the eurozone has a bleak economic forecast for 2025, with persistent economic and political instability, a Chinese economy that is slowing and implications of a Trump2 Presidency, all of which will negatively impact the Euro.

As 2024 draws to a close, the ECB (European Central Bank) on Thursday 12^th December cut interest rates for the fourth time this year. This is the third back-to-back interest rate cut, bringing total quantitative easing to 100 basis points for the year. As inflation draws closer to the key benchmark figure of 2%, the ECB cut its key deposit rate by 25 basis points (1/4 of 1%) from 3.25% to 3%.

It is interesting to note that there has been a change in rhetoric coming out of the ECB, where the statement “keeping rates sufficiently restrictive for as long as necessary” has been dropped, indicating a more dovish attitude to interest rate cuts. The ECB said in a statement “The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium target, and it will follow a data-dependent and meeting-by-meeting approach determining the appropriate monetary policy stance”. 

Despite no firm commitment from the ECB, and whilst the economy remains weak and inflation is closing in on the target of 2%, financial markets feel the door has been left open for further cuts in 2025. The ECB has also cut its prediction for growth next year, with President Lagarde seeing risks to growth tilted to the downside, leaving many analysts convinced that there will be more rate cuts in 2025.

The ECB also produced their quarterly staff macroeconomic projections, lowering their inflation forecast for 2024 from 2.5% down 0.1% to 2.4%, with the outlook for 2025 also being lowered by 0.1% from 2.2% down to 2.1%. Meanwhile, growth predictions for 2025 have been lowered by 0.2% to 1.1% down from 1.3%. Growth, as mentioned above, is tilted to the downside, with President Lagarde saying this will be partly due to “greater friction in global trade”. However, potential forecasts are definitely more difficult with experts citing President elect Donald Trump’s tariffs policy as the main reason for lack of clarity. 

Experts said that messages from the ECB on Thursday 12 December showed a clear commitment to further interest rate cuts. However, there is uncertainty over where the Bank sees what they call the “Neutral Rate”, where their monetary policy is boosting or restricting growth. However, a number of economists have noted that weak PMIs* could push the ECB into a bigger cut of 50 basis points at their next policy meeting on Thursday 30^th January 2025.

*PMI – This is an acronym for the Purchasing Managers Index and is an indicator of the prevailing direction of economic trends and service sectors. It looks at key indicators that show signs of retraction of growth in the economy such as production, employment, and inventory levels.