Synopsis:
Bank of America anticipates a 25 basis point rate cut from the European Central Bank (ECB) this week but expects limited impact on the euro (EUR) due to market pricing. They maintain a cautious outlook, highlighting potential upward risks for the EUR amid geopolitical tensions and approaching U.S. elections.
Key Points:
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Rate Cut Expectations:
BofA forecasts the ECB to reduce all policy rates by 25 basis points, initiating a series of back-to-back cuts aimed at reaching a 2% deposit rate by June and 1.5% by the end of 2025. They emphasize that the eurozone economy requires neutral rates, possibly even stimulus. -
Limited EUR Impact Anticipated:
The market has largely priced in these expected cuts for both October and December, suggesting minimal immediate impact on the EUR around the upcoming ECB meeting. Historical patterns show that the EUR has experienced well-contained fluctuations during past ECB meetings. -
EUR Risks and Positioning:
Despite the anticipated cuts, BofA notes that risks for the EUR tilt upwards due to the ECB's cautious and gradual approach. They advise against aggressively chasing the EUR higher against currencies that typically perform well in risk-off scenarios and suggest selective strategies against higher beta currencies. -
Broader Currency Strategy:
While the EUR/USD is likely to be influenced primarily by developments related to the U.S. Federal Reserve, BofA remains constructive on the EUR against the Japanese yen (JPY), Swiss franc (CHF), U.S. dollar (USD), and, to a lesser extent, the New Zealand dollar (NZD). Conversely, they maintain a bearish outlook on the EUR against the British pound (GBP), Scandinavian currencies, and the Australian dollar (AUD).
Conclusion:
In summary, BofA expects the ECB to cut rates, but with limited immediate impact on the EUR due to existing market pricing. The outlook for the EUR will be shaped more by U.S. developments and geopolitical factors rather than eurozone-specific events. Investors should remain selective in their EUR positioning, focusing on relative strengths against various currencies.