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Mar 01 - 09:55 AM

SocGen: Analyzing EUR/USD's Narrow Trading Range Amid Central Bank Policy Speculations

By eFXdata  —  Mar 01 - 08:30 AM

Synopsis:

Société Générale highlights the limited trading range of EUR/USD in the recent year and the beginning of 2024, attributing the stagnation to a lack of monetary policy divergence among central banks. The discussion revolves around which central bank will initiate rate cuts first and the extent of such adjustments. SocGen forecasts the Federal Reserve to commence rate cuts earlier and more aggressively than the European Central Bank (ECB), projecting 75 basis points (bps) of cuts from the Fed compared to 50bps from the ECB. However, market expectations differ slightly, anticipating 75bps of cuts from the Fed starting in July and 93bps from the ECB, with the first full cut expected in June.

Key Points:

  • 2023's Narrow Trading Range: Last year's trading range for EUR/USD was notably narrow, reflecting a lack of significant monetary policy divergence between the Fed and the ECB.

  • Central Bank Rate Cut Speculations: The ongoing debate in the financial markets focuses on which central bank will be the first to ease monetary policy and the magnitude of such easing.

  • SocGen's Forecasts vs. Market Pricing: SocGen predicts the Fed will initiate rate cuts before the ECB, with a more substantial total reduction. Market pricing slightly diverges, especially regarding the ECB's expected easing.

  • Potential for a Fed Hike: A serious consideration of a Fed rate hike could sharply decrease EUR/USD, but without such a scenario, a narrow trading range with a slight EUR upside bias is anticipated.

Conclusion:

SocGen suggests that EUR/USD is likely to continue trading within a narrow range due to the lack of clear monetary policy divergence between major central banks. While SocGen predicts the Fed to lead with rate cuts, the difference in market pricing for the ECB's easing suggests a complex outlook for EUR/USD movements. Without the prospect of a Fed rate hike, traders should prepare for continued limited volatility in EUR/USD, with a minor bias towards EUR appreciation.

Source:
Société Générale Research/Market Commentary

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