As the market anticipates that the European Central Bank will further lower interest rates to support a weak economy, the euro's recent decline has intensified, nearing its lowest point since August. During the New York trading session, the euro fell 0.2% against the dollar to $1.0793. The market uncertainty mainly stems from internal monetary policy signals from the European Central Bank and external geopolitical risks.
Recent comments by Mario Centeno, a member of the European Central Bank's Governing Council, have sparked market expectations for easing. He suggested that if future data supports it, the central bank may increase its monetary easing efforts. Following this, ECB President Lagarde also stated that although the direction of rate adjustments is relatively clear, the specific steps depend on future circumstances. This series of remarks has further increased market concerns about the economic outlook for the eurozone.
The sustained pressure on the euro is due not only to internal economic slowdown but also to the strong dollar. With the U.S. presidential election approaching, the market anticipates that Republican candidate Trump may win again, leading to a surge in demand for the dollar. Investors expect Trump might adopt higher tariff policies, which could elevate U.S. inflation levels and exacerbate geopolitical tensions globally. Against this backdrop, the appeal of the dollar has strengthened, putting additional downward pressure on the euro. Analysts point out that Trump's victory could lead to higher tariffs on imported goods, causing the dollar to strengthen significantly and potentially driving the euro down to the 1-dollar mark, or even a further 10% drop.
European markets are also betting that the ECB will continue to cut rates, especially with recent inflation data falling below expectations. Currency markets show that investors believe the ECB might lower interest rates by 50 basis points in its December meeting, and such rate cut expectations are rapidly increasing. According to swap transactions, it's expected that by the end of 2025, the ECB's rates may be reduced by a total of 135 basis points. This accommodative monetary policy undoubtedly increases depreciation pressure on the euro.
Meanwhile, short-term market bets on the euro against the dollar are focused on breaching the $1.08 threshold. According to data from the Depository Trust & Clearing Corporation (DTCC), the largest bets in the options market are that the euro will continue to weaken. Financial institutions like JPMorgan and ING have warned that the euro is very likely to decline further to parity with the dollar. Goldman Sachs predicts that if Trump and the Republicans win the election, the euro may drop by 10%, significantly increasing the possibility of the euro falling below $1.
Goldman's analysis suggests that a Trump victory might drive the U.S. to implement higher tariff policies and stimulate economic growth through domestic tax cuts. These measures will accelerate U.S. inflation, prompting the Federal Reserve to adopt higher interest rates. In contrast, Europe's low-interest-rate environment will make the dollar more attractive. The euro has fallen 2.7% since October, further reflecting the market's negative expectations for the currency's future trend.
Although there hasn't been a notable increase in hedging against the euro falling below parity in over-the-counter trading, JPMorgan indicates that recent euro selling pressure has risen, particularly with some put option strike prices set around $1. Market risk reversal indicators also show that euro bearish sentiment has reached its highest point in three months, with the cost of hedging the euro continually climbing.
The market's trajectory in the coming weeks will depend on the ECB's policy dynamics and the further development of the U.S. election situation, leaving the euro's fate hanging in the balance under dual pressures.
