ANZ assesses the Euro's (EUR) prospects, suggesting a lack of immediate bullish catalysts. Although growth pessimism in the Euro Area (EA) appears to have peaked—limiting further EUR declines—significant drivers for a strong EUR recovery are absent in the near term. A weaker USD and improved sentiment around China's economic stabilization could eventually support EUR growth, but these are viewed as medium-term influences.
EUR Stability: Current sentiment and disinflation trends in the EA have largely been priced into the EUR, offering some stability but lacking immediate upside momentum.
Inflation and ECB Policy: Core EA inflation's monthly increase contrasts with a yearly easing trend, suggesting continued disinflation. This trajectory, coupled with decelerating growth, is expected to prompt the European Central Bank (ECB) to initiate rate cuts by early Q2, slightly ahead of the Federal Reserve's anticipated Q3 cuts.
EUR-USD Dynamics: The EUR's near-term outlook is closely tied to USD movements. Last year's EUR gains against a weakening USD highlight this relationship. The timing and pace of ECB vs. Fed rate adjustments, highly contingent on forthcoming economic data, will be critical in shaping EUR-USD rate differentials and the EUR's trajectory.
While the EUR faces limited downside risk due to already-adjusted growth expectations, its near-term prospects lack strong bullish drivers. The anticipated disinflationary path and an ECB poised for spring rate cuts may not immediately catalyze EUR strength. Instead, broader shifts in USD dynamics and medium-term improvements in China's economic outlook are likely to be more influential for the EUR's recovery. Investors should closely monitor upcoming data releases for signs of policy convergence between the ECB and Fed, which could recalibrate EUR-USD expectations.