MUFG Bank said the European Central Bank could introduce additional interest rate cuts by mid-2026, but noted that this might not prevent the euro from strengthening against the US dollar, given expectations that the US Federal Reserve will begin a more rapid easing cycle during the same period.
The bank's analysts explained that the Fed is likely to be more aggressive in cutting interest rates than the ECB, which could lead markets to price in further US cuts, narrowing the yield gap between the two currencies in favor of the euro.
The report indicated that the ECB does not see an immediate need to change its monetary policy, but still maintains potential room for further easing if eurozone inflation continues to decline in the medium term.
MUFG added that energy prices could decline in the coming months as OPEC+ production increases and China shifts some of its exports away from the US market, factors that could further slow inflation in Europe.
Analysts believe that these developments could lead to diverging monetary policy momentum between the United States and the Eurozone, with the Federal Reserve expected to adopt a more accommodative approach while the European Central Bank remains cautious.
The report emphasized that a faster pace of easing by the Federal Reserve could limit the strength of the dollar, supporting the EUR/USD pair to remain near its medium-term highs, even if the European Central Bank cuts interest rates further.
Observers believe that these developments could create a more balanced environment in currency markets over the next two years, as investors await any new signals from central bank officials regarding monetary policy directions.
-255*160.webp)
