The shifting expectations regarding policy rates of the U.S. Federal Reserve and the European Central Bank (ECB) have played a pivotal role in recent developments, notably leading to an upswing in long U.S. Treasury yields and a decline in the euro’s value relative to the dollar. Jussi Hiljanen, the chief strategist for USD & EUR rates at SEB Research, shared this observation in a recent note.
Hiljanen highlighted the significance of clear signals regarding the U.S. economy’s softening. Without such indications, the forward-pricing of ECB rate cuts may continue to outpace those of the Federal Reserve or potentially diverge further in the weeks ahead. This divergence stems from the differing perspectives on economic conditions and monetary policy stances between the two central banks.
SEB Research suggests that if their expectations materialize, with the Federal Reserve implementing more substantial policy rate reductions than the ECB in 2024, it could lead to a narrowing of U.S.-eurozone yield spreads. This adjustment may subsequently result in an increase in the EUR/USD exchange rate. Such a scenario could offer opportunities and challenges for market participants as they navigate the evolving landscape of global currency markets.