The following is a rewritten and expanded version of the article originally authored by James Skinner on PoundSterlingLive.com, titled “Euro-Dollar Rally Paused Until 2026 Warns Basel-Based Strategist”. This extended version provides a comprehensive breakdown of the key arguments, market outlooks, and macroeconomic factors discussed in the original piece to meet a minimum of 1,000 words.
Euro to Dollar Rally Likely Paused Until 2026, Says Basel-Based Strategist
Investor hopes for a sustained recovery in the EUR/USD exchange rate may need to be tempered, as key macroeconomic indicators and diverging monetary policies suggest the euro’s recovery against the US dollar could be delayed until as late as 2026. This cautious outlook is based on forecasts from Basler Kantonalbank’s Managing Director and Head of Foreign Exchange Strategy, Dr. Armin Peter, who indicates that fiscal and monetary policy trends in both the Eurozone and the United States will likely keep the euro-dollar pair subdued for the foreseeable future.
Overview of Euro-Dollar Performance
The euro dollar (EUR/USD) currency pair has witnessed a turbulent few years, marked by global economic uncertainty, monetary divergence, and geopolitics. While the pair staged a partial recovery in the months following the ECB’s rate hiking cycle that began in 2022, any substantial and sustained appreciation of the euro remains elusive in 2024.
According to the analysis provided by Dr. Armin Peter, the current rally in EUR/USD may be essentially “paused” until at least 2026, barring significant shifts in economic policy or risks. His conclusion is driven by a combination of factors including growth differentials, central bank interest rate paths, and structural challenges within Europe.
Key Points from Dr. Armin Peter:
– The EUR/USD rally is unlikely to resume until around 2026.
– Divergent monetary policies between the Federal Reserve and the European Central Bank (ECB) are keeping pressure on the euro.
– Fiscal expansion plans in the US are more aggressive than in the Eurozone.
– Lower productivity and growth prospects in Europe compared to the US point to long-term dollar strength.
– Political risks and uncertainty also weigh more heavily on the euro than on the dollar.
Examining the Role of Monetary Policy Divergence
Monetary policy remains one of the most critical drivers for major currency pairs, and nowhere is this more evident than in EUR/USD. The Federal Reserve (Fed) and the ECB had both embarked on aggressive tightening cycles in response to soaring inflation rates post-pandemic. However, the pace, intensity, and expected duration of these tightening phases have diverged considerably.
– The Federal Reserve reached peak interest rates more quickly and has remained committed to maintaining high rates longer to reach its 2 percent inflation target sustainably.
– The ECB, meanwhile, faces weaker economic data and lower inflation pressures, making it more inclined to discuss early rate cuts.
– Market pricing reflects these divergences, with investors expecting the ECB to cut interest rates earlier and deeper than the Fed.
This divergence reduces the attractiveness of the euro relative to the dollar due to lower yields and weaker forward guidance on returns for holding euro-denominated assets.
US Fiscal and Economic Strength Advantage
One factor underpinning continued dollar resilience is the strength of the US economy relative to its European counterparts. The US economy continues to outpace the Eurozone on most growth metrics.
Reasons the US Economy Maintains an Edge:
– Robust spending supported by large fiscal programs such as the Inflation Reduction Act and infrastructure spending initiatives.
– Higher labor productivity rates and a more dynamic structural economy.
– A technology and innovation sector that continues to drive GDP higher through investment and exports.
– Lower exposure to geopolitical energy disruptions compared to Europe.
These macro advantages align with investment flows preferring dollar-denominated assets, thereby maintaining upward pressure on the USD.
Eurozone Structural Weaknesses Persist
While the US benefits from technology-driven dynamism and a flexible labor market, the Eurozone continues to grapple with stagnant growth and
Read more on EUR/USD trading.