Investing.com – The euro is likely to continue its struggle against the dollar as weaker economic growth and faster rates of deflation in the European Union could likely force the European Central Bank to cut rates more aggressively than the Federal Reserve.
fell 0.52% to $1.0862.
“We continue to expect EUR/USD to decline,” Morgan Stanley said in a recent note, highlighting several factors that will widen the divergence between US and EU rates, including faster EU deflation and slower economic growth.
The slowdown in European inflation is forecast by Morgan Stanley to be “accelerating faster and at a lower starting rate than US inflation,” giving the ECB the opportunity to “signal a faster pace of cuts than currently assumed.”
Bets on an ECB rate cut already in June were raised on Wednesday after the Swiss National Bank’s surprise decision to cut its base rate.
Swaps are now priced at a 90% chance of an ECB rate cut by June, up from around 80% on Wednesday, with just under four, or 90 basis points, or rate cuts now baked in.
Meanwhile, the strength of US economic growth relative to the EU may prompt the Fed not to cut rates as low as in previous cycles, Morgan Stanley said. But other central banks, including the ECB, may not have that luxury, paving the way for the US dollar to “likely retain its edge over the euro”, he added.
Meanwhile, slower growth outside the US and ongoing geopolitical risks will also likely support the US dollar’s strength, “especially as the US election approaches”, Morgan Stanley said.