The European Central Bank has cut its policy rate multiple times and have signalled that more interest rate cuts are coming. Inflation has begun to move down toward the central bank’s 2% target and economic growth has been stagnant and shown no signs of a recovery. The absence of any signs of a recovery strongly suggests that we should expect the central bank to keep cutting interest rates. We expect consecutive interest rates cuts at the upcoming meetings. Tariffs on Europe, especially the German auto sector, would put downward pressure on an already vulnerable economy. We expect the central bank will stop cutting interest rates once they reach 2.25%, but we do acknowledge that downside risks are emerging and that they point to more cuts and not fewer cuts. Diverging monetary policy and the potential for tariffs bolster our view that EUR/USD will dip below the trading range that we have had over the past six quarters. Trump’s stance on NATO and military defence spending has also had a negative impact on the ongoing tightening of asset swap spreads in the euro area, which could put additional downward pressure on the euro. - Nordea
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