Synopsis:

Goldman Sachs expects the Fed to cut rates twice in 2025 (June & December) and once more in June 2026, while the ECB will continue sequential 25bp cuts until July 2025, reaching 1.75%. However, if growth weakens further, the ECB could cut more aggressively.

Key Points:

1. Fed Outlook: Gradual & Limited Rate Cuts

   • Two 25bp cuts in 2025 (June & December), followed by one more in June 2026.
   • Terminal rate: 3.5-3.75% (no aggressive easing expected).
   • Additional cuts in 2025 are a close call, depending on inflation trends and labor market conditions.

2. ECB Outlook: Sequential Cuts with Flexibility for Faster Easing

   • 25bp cuts at each meeting until July 2025, bringing the rate to 1.75%.
   • If Eurozone growth deteriorates, ECB could cut faster and deeper than currently projected.

Conclusion:

Goldman Sachs expects a cautious Fed, keeping rates elevated longer, while the ECB is on a clearer path to continued easing. The relative policy divergence supports USD strength over EUR in the near term, but a weaker US economy in H2 could shift dynamics.