EUR/USD - A Long-Term Bullish Thesis

Although the next move in rates for all G10 central banks, besides the BoJ, is almost certain to be a cut, likely marking the beginning of an easing cycle, there are set to be some notable divergences in the timing of such a cut, and the extent of policy normalisation that will subsequently be delivered. I use “normalisation”, incidentally, rather than ‘loosening’, as rates are likely to return to a more neutral level, with policy not likely to become outright ‘easy’ barring a financial accident.

In any case, while the broader direction of travel that policy will take should continue to prove supportive for the risk backdrop, and insulate global equities from significant shocks, the differing paths taken by G10 policymakers may, eventually, breathe some life into the FX arena.

In terms of who cuts first, the ECB and the SNB seem like the frontrunners at this stage – both dealing with more rapid than expected disinflationary progress, with the latter even now seeing CPI in the low-1%s, while the former continues to battle anaemic economic growth, and multiplying downside risks.

While an April ECB cut, as seems most likely at this point, and would pose a headwind for the common currency as markets increasingly move to price in such a reduction, cutting ‘slow and early’ might not be all bad news. There is an argument that such an early cut could in fact prove the foundations of a bull case for the EUR in H2 24, were said cuts able to put a floor under the bloc’s ailing economy though, the EUR will likely have to endure some short-term pain, before that potential long-term gain.