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Investing.com — The euro will likely continue to struggle against the dollar as weaker economic growth and a faster pace 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 (NYSE:) said in a recent note, highlighting several factors that will expand the divergence between US interest rates and EU rates including faster pace of deflation in EU and slower economic growth.
The deceleration in European inflation, Morgan Stanley forecasts, will “happen faster and from a lower starting pace than US inflation,” paving the way for the ECB to “signal a faster pace of cuts than currently implied.”
Bets on an ECB rate cut as soon as June were boosted on Wednesday, following the surprise move by the Swiss National Bank to lower its benchmark rate.
Swaps are now pricing in a 90% chance of an ECB rate cut by June, up from about 80% on Wednesday, with just under four, or 90 basis points, or cuts now priced in.
The strength of the growth in the U.S. compared in the EU, meanwhile, could encourage the Fed not to cut as low as during previous cycles, Morgan Stanley said. But other central banks including including the ECB may not have that luxury, paving the way for the USD to “likely retain a carry advantage over EUR,” it added.
Slower growth beyond the U.S. and ongoing geopolitical risks, meanwhile, is also likely to support a stronger greenback, “particularly as the US elections approach,” Morgan Stanley said.
