2025 EUR/USD Outlook Fundamental Preview

This is an excerpt from our full 2025 EUR/USD Outlook report, one of nine detailed reports about what to expect in the coming year.

Key points for the Euro 2025 outlook

• Euro set to close 2024 down more than 6.2%- three-month reversal plunges to fresh yearly low
• FOMC outlook trims expectations for aggressive rate cuts in 2025- USD bulls in control into yearly cross
• ECB concerns shift from inflation to growth in 2025- geo-political instability, trade war concerns

Euro is poised to close 2024 just off the yearly lows with EUR/USD plunging nearly 7.9% off the highs in just eight short weeks. The decline puts parity within striking distance into the 2025 open and with the FOMC signaling a slower pace of rate cuts next year, the US Dollar may be poised for continued strength.

Federal Reserve in the Spotlight

In December, the Federal Reserve cut interest rates for the third time in 2024 (100bps total) but signaled the potential for a slower pace of cuts heading into 2025. While one could strongly argue the strength of the US economy puts into question whether any additional cuts are even necessary, the central bank continued to suggest the potential for two-more cuts with the committee projecting the Federal funds rate at 3.9% for next year.

The shift into the close of the year suggests the FOMC expects inflation to remain sticky into 2025 and may limit the central bank’s scope to further normalize rates. Indeed, the updated Summary of Economic Projections showed a dramatic increase in both headlines and core inflation next year with unemployment and growth improving slightly. From an economist point of view, the projections highlight a difficult environment to justify additional easing and IF inflation does persist, the markets may need to further adjust interest rate expectations, to the benefit of the US Dollar.

FOMC Summary of Economic Projections

Source: FOMC

Note that the central bank’s interest rate dot plot shows a marked increase in for the appropriate level of rates into 2025 from the last update in September. The move fueled a shift in the expectations for the first quarter with the Fed Fund Futures now pricing in a 50% probability for a March rate cut.

FOMC Interest Rate Dot Plot

Source: FOMC

ECB 2025 Outlook Characterized by ‘Uncertainty’

The ECB cut interest rates for a fourth time in December with the President Christine Lagarde noting an abundance of uncertainty heading into 2025. With inflation largely expected to return to the central bank’s 2% target early next year, the focus now shifts to downside risks to growth as ongoing political instability in the Eurozone and the rising threat of a new U.S trade war cloud the 2025 outlook. With more easing expected as early as January, the interest rate differential may continue to bolster the greenback into next year with the broader outlook for monetary policy still favoring the EUR/USD bears for now.

Source: ECB

This is an excerpt from our full 2025 EUR/USD Outlook report, one of nine detailed reports about what to expect in the coming year.