Horizon Q4│2024 - Currencies
Reading time:10 MIN
Major central banks step away from the interest rate peak
In the US, declining inflation and the cooling labour market in recent months have led the currency market to price in an earlier and more aggressive interest rate turnaround by the Fed. This prospect has recently taken some of the wind out of the greenback's sails. Since late summer, it has not only lost some of its previous strength against the euro.
Although the US Federal Reserve began its interest rate turnaround somewhat later than the ECB, it could now cut its key interest rate faster than is likely to be the case in the eurozone. For the US dollar, this means continued devaluation pressure. In addition, the US economy is likely to cool down further in the coming months, while the still hesitant upturn in the eurozone could gain some momentum in the coming year. We therefore expect the euro to appreciate slightly against the greenback in 2025.
The dollar has recently lost some of its strength
Nominal effective exchange rates
In the medium term, a certain amount of euro strength is therefore to be expected. In the run-up to the US presidential elections on 5 November, however, the US dollar could receive another temporary tailwind. This is because the greenback is always in demand as a safe haven in politically uncertain times – ironically, even when the uncertainty emanates from the US.
The Swiss franc also enjoys strong demand, particularly in turbulent times. This was once again evident at the beginning of August, when price slumps on the global stock markets caused the franc to appreciate significantly. In the short term, the US election could create some additional demand for the franc, but the exchange rate will move closer to parity again by the end of the year. After that, the exchange rate will be determined by the further actions of the central banks. Also, the ECB and the Swiss central bank will take very similar approaches here, which is why we expect the euro-franc exchange rate to move sideways in the coming year.
Swiss franc recently in demand as a safe haven
Euro exchange rates
The BoE has initiated the interest rate turnaround from a slightly higher level than the ECB and is therefore likely to lower its key interest rate somewhat more than its European counterpart in the eurozone. Although the lower interest rate differential speaks against the pound, the UK economy currently has slightly more momentum than in the eurozone. Overall, we therefore expect the euro-pound exchange rate to move sideways.
Exchange rate forecasts
Berenberg and consensus forecast in comparison, values at mid-year 2025 and at year-end
Author
Dr. Felix Schmidt
Senior Economist
