By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News. December 24, 2024. Article no 1344.

The euro has fallen sharply amid growing concerns about weak economic growth in the Eurozone and political instability, particularly following the recent appointment of a new French government by President Emmanuel Macron. Analysts, including Ipek Ozkardeskaya from Swissquote Bank, suggest that these factors are increasing expectations for significant interest rate cuts by the European Central Bank (ECB) to stimulate the economy.

Key Factors Influencing the Euro’s Decline

Weak Economic Growth: The Eurozone is experiencing sluggish economic performance, with forecasts indicating growth rates of only 0.7% for 2024. This has raised fears that the ECB may need to implement aggressive rate cuts to support economic activity.

The ECB reportede that the annual average real GDP growth is projected to be 0.7% in 2024, 1.1% in 2025 and 1.4% in 2026.

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Political Turmoil: The appointment of Francois Bayrou as France’s fourth prime minister this year has added to political uncertainty within the Eurozone. Such instability can undermine investor confidence and contribute to currency depreciation.

Interest Rate Expectations: Following a series of rate cuts by the ECB, including a recent reduction of 25 basis points to 3%, market participants are speculating on further cuts in early 2025. The ECB’s easing bias is evident as it shifts focus from maintaining restrictive policies to fostering economic recovery.

Market Reactions

The euro has already seen significant depreciation against the US dollar, reaching near two-year lows. This decline is exacerbated by contrasting monetary policies between the ECB and the U.S. Federal Reserve, which has adopted a more hawkish stance recently. In addition, the return of Donald Trump at the U.S. presidency strenghtens the dollar.

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Market analysts predict that if upcoming economic indicators, such as purchasing managers’ indices (PMIs), continue to show weakness, this could lead to even larger rate cuts than currently anticipated, potentially exceeding 50 basis points in future meetings.

In summary, the euro’s decline is driven by a combination of weak growth prospects and political instability in Europe, alongside expectations for further monetary easing by the ECB.

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© Copyright 2024 – Eurasia Business News. Article no. 1344.