US dollar vs. the euro as the Fed starts cutting rates, ECB holds

Rabobank Head of FX Strategy Jane Foley comes on Market Catalysts to compare the performance of the US dollar (DX=F, DX-Y.NYB) and the euro (EURUSD=X) as the Federal Reserve returns to cutting interest rates and the European Central Bank (ECB) begins to ease up on its monetary policy.

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Video Transcript

00:00 Speaker A

We got to talk about currencies on a relative basis, right? So let's take the dollar versus the euro as one example. At a time when we've got cuts cutting cutting cycle here in the US and not the same kind of trajectory in the EU, does that imply that in particular we could see euro strength?

00:23 Speaker B

Well, not necessarily because it's so well priced in. You know, Christine Lagarde at the last ECB meeting uh indicated that perhaps the ECB has finished with its easing cycle. That's rubber banks view too and you know, we're certainly not alone in in that view either. So, yes, the the ECB has probably stopped using the Fed has got more to go. But that's already in the price. So we would have to have a significant change in the economic data and the outlook for both the Eurozone economy or the US economy to to really shake up that view. So given that's what we've got, given that's what we've got we've got in the price, you know, you have to ask, well, you know, the euro has has has rallied an awful lot this year. A lot of that because of the optimism about uh the change in Germany's uh fiscal break, about the optimism about what that could do, not just for the German economy, but for the Eurozone economy. But look at the German economic data that's coming through. It's not that great. Look at the IFO last week. It really wasn't that great. Uh the the the market consensus for German growth this year is just 0.3%, which is not that great. And so bearing in mind the headwinds that the Eurozone economy has got in terms of relatively high energy prices, for instance, a trade tariff, a stronger exchange rate than it used to have. Well, you know, I think there is it's going to be pretty tough, I think for the euro to keep on going higher from current levels.

01:52 Speaker A

So Jane, as we talk about two major currencies where we already know a lot or think we know a lot about the trajectory and a lot is in the price. As you look out over the next year, what's the big surprise that you expect or where in in currency markets, where's the biggest dislocation and where you think there could be some opportunity?

02:27 Speaker B

Well, I mean the the the biggest surprise would be if the dollar did not keep on weakening and that's the market consensus. The market consensus for a while has been, you know, looking at 120 and wondering how long it was going to take. Uh that could be a lot further away than than we think. and very much depends on the US economic data. payroll is clearly in view for this week. That's going to be really important in this argument about, you know, how slow is the US economy going to be this year or or or not. So that that number is is going to be, I think really very important. But, you know, aside from that, you know, the Yen, I think is really interesting. um, the possibility that they may hike interest rates again potentially in October. That's an interesting one. And Sterling, you know, very interesting. We've got that uh UK budget on the 26th of of November, uh the the Labor Party conference right now in the UK. You know, and Sterling we think is probably going to remain on on the back foot because it's going to be so difficult for Rachel Reeves, the Chancellor to get herself out of a position that she is really quite tightly boxed into. Related Videos

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