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22.11.202400:49 Forex Analysis & Reviews: The Dollar Slows Down

Relevance up to 08:00 2024-11-26 UTC--5

Is the over 6% drop in EUR/USD from September's highs excessive? Have the bears gone too far in pricing in the "Trump factor"? The current consolidation of the major currency pair indicates that investors are reassessing their positions. There's no guarantee that the new U.S. president will deliver on ambitious plans, and if not, the euro may be undervalued. Additionally, investors could be preparing for data on European business activity for November.

Credit Agricole believes the divergence between the Federal Reserve and European Central Bank policies is less pronounced than financial markets perceive. Wage growth in the eurozone has reached its highest levels since 1990, which should fuel inflation. Similarly, Donald Trump's tariffs and the associated weakening of the euro could slow the ECB's monetary easing cycle despite comments from the Governing Council suggesting otherwise.

European Wage Trends

Exchange Rates 22.11.2024 analysis

Francois Villeroy de Galhau, Governor of the Bank of France, asserts that the new U.S. president's protectionist policies will not alter the ECB's plans to ease monetary policy. October's rate cut on deposits to 3.25% is not the last, as GDP growth risks are tilted to the downside due to potential trade wars.

His colleague from Greece, Yannis Stournaras, argues that the ECB must quickly bring borrowing costs to a neutral level that neither restricts nor stimulates the economy—estimated at around 2%. The Governing Council member believes rates should be reduced at every meeting until they hit this level.

One hundred twenty-five basis points are more than markets expect from the Fed, which is forecast to implement one monetary easing move in 2024 with a 55% probability and three more in 2025. This would widen the differential in favor of the U.S. central bank, potentially driving EUR/USD toward parity.

Federal Funds Rate Trends

Exchange Rates 22.11.2024 analysis

Reuters experts echo similar forecasts. Out of 106 respondents, 94 anticipate a Fed rate cut in December, compared to just 12 expecting no changes (up from 3 in October's survey). The consensus suggests quarterly federal funds rate cuts in 2025, with a pause expected by October-December. The rate is projected to fall to 3.75%, 50 basis points higher than the previous forecast.

These estimates likely account for both fiscal stimulus and tariffs from Donald Trump. However, if the new U.S. president fails to implement these measures, the Fed could accelerate its actions, negatively impacting the U.S. dollar.

Exchange Rates 22.11.2024 analysis

On the daily chart, EUR/USD is consolidating within a downward trend. A breakout above the 1.061 level would enable the bulls to initiate a correction. Conversely, a successful test of the lower boundary at 1.051 could pave the way for establishing new or increasing existing short positions.

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