Synopsis:

MUFG anticipates the EUR could see near-term strength in December due to limited fresh catalysts for further weakness, though seasonal patterns suggest potential reversal early in 2025.

Key Points:

• Recent EUR/USD Decline:

  • EUR/USD has dropped roughly 8 big figures since trading near 1.1200 pre-US election, driven by Trump’s victory and anticipated trade and fiscal policies.
  • Markets now await new triggers for another leg lower.

• Seasonal Dynamics:

  • Historically, the EUR has shown a tendency to strengthen in December, only to reverse gains between January and March.
  • MUFG’s quantitative analysis, however, finds this December outperformance lacks statistical significance.

• Potential Catalysts for EUR Weakness:

  • The ECB signals or implements a larger 50bps rate cut.
  • The Fed skips a rate cut this month, maintaining current policy rates.
  • President-elect Trump escalates rhetoric on EU trade tariffs.

Conclusion:

While EUR/USD may stabilize or strengthen slightly in December due to stretched short positioning and lack of immediate bearish triggers, MUFG expects this to be temporary. Renewed weakness is likely between January and March, driven by further monetary divergence and potential trade tensions.