MUFG: EUR/USD could test parity in 2025 before modest recovery

MUFG expects the euro to remain under pressure in 2025, driven by anticipated U.S. trade policies and geopolitical tensions, with EUR/USD potentially testing parity before staging a modest recovery.

Key Points:

• Election Impact: The euro fell sharply following Donald Trump’s election victory, with markets bracing for aggressive trade, immigration, and fiscal policies.
• Tariff Risks: U.S. trade tariff actions are expected to dominate FX dynamics in early 2025, with the euro particularly vulnerable given the euro-zone’s significant trade surplus with the U.S.
  • The U.S.-euro-zone trade deficit widened from $158bn in 2019 to $196bn by September 2024.
• Geopolitical Pressures:
  • Trump may leverage the euro-zone’s underperformance on NATO defense spending targets as additional justification for tough trade measures. Of eight NATO countries below the 2% spending threshold, seven are in the euro-zone.
• Economic Divergence: Anticipated policies could further widen growth and monetary policy differentials between the U.S. and euro-zone, pressuring EUR/USD lower.

Conclusion:

MUFG forecasts that EUR/USD could test parity in 2025 due to aggressive U.S. trade actions and geopolitical strains. However, a modest recovery is expected later in the year as markets adjust to the new policy environment.

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This article was written by Adam Button at www.forexlive.com.