Synopsis:

Barclays anticipates further downside for EUR/USD, driven by Trump’s proposed tariff policies, an accelerated ECB rate-cutting cycle, and disappointing stimulus efforts from China. These factors contrast with the Fed’s hawkish outlook, intensifying headwinds for the euro.

Key Points:

1. US Tariff Policies:

   • President-elect Trump’s planned tariffs add to the euro’s challenges, compounding existing economic vulnerabilities in the Eurozone.

2. Divergent Monetary Policy:

   • The ECB’s accelerated rate-cutting cycle reflects downside risks to the Eurozone’s neutral interest rate (R*).
   • This stands in sharp contrast to the Fed’s hawkish repricing, widening policy divergence.

3. China’s Stimulus Impact:

   • While effective Chinese stimulus could provide support for the euro, policy announcements to date have been underwhelming.

4. Data Green Shoots:

   • Some recent positive Eurozone data has emerged but is insufficient to offset broader headwinds.

Conclusion:

Barclays expects EUR/USD to continue its downward trajectory, grinding below 1.05. Persistent tariff risks, ECB easing, and limited external support leave the euro vulnerable, particularly against the backdrop of a stronger USD.