COMMENT-ECB will probably lead the euro back down

The European Central Bank's tightening cycle fuelled a big rise in the value of the euro, and an imminent easing cycle will probably lead it back down.

During the period that the ECB's deposit rate rose from -0.5% to 4.0% the trade-weighted value for the euro rose by roughly 8.5%.

The euro has began to fall in advance of expected interest rates cuts that are seen beginning in June, with the deposit rate eyed around 3.0% by the end of this year. Polls suggest the deposit rate could drop to 2.5% in the second quarter of 2025.

The euro which became overbought as result of the tightening cycle will very likely surrender some of the strength it still retains while rates drop, resulting in a flush of the many wagers still made on euro rising.

Given the extent of expected easing, the euro may surrender a similar amount of its prior gains - roughly one third - and that's in keeping with charts where a minor correction equates to 38.2% of a prior move.

If so the euro could slide 1.5-2.0% by the end of this year, with EUR/USD sinking toward the low end of ranges traded in the past year, which is 1.04-1.05. The pound is also likely to drop.

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