Barclays Revises Euro Outlook Amid Anticipated ECB Rate Cuts and Slower Growth Projections
In a recent analysis, Barclays' strategists have adjusted their outlook on the euro, indicating that while recent European fiscal initiatives, such as Germany's substantial stimulus package, have reduced the chances of the euro reaching parity with the U.S. dollar, the potential for a significant euro rally remains limited. They note that the initial phase of euro-positive repricing in European rate markets is likely over, and market sentiment is rapidly turning against the dollar.
In light of these developments, Barclays recommends investors consider short positions in the Chinese yuan (CNH) against the dollar, suggesting that the yuan's tariff premium is underpriced compared to the euro and that it faces additional growth headwinds.
Furthermore, Barclays anticipates that the European Central Bank (ECB) will implement a series of interest rate cuts in response to a decelerating growth outlook. The bank projects that the ECB's updated forecasts will show downward revisions to growth projections for 2025 and 2026, with GDP growth expected at 0.9% in 2025, down 0.2 percentage points from the December projection, and at 1.3% in 2026, lower by 0.1 percentage points. Consequently, Barclays expects the ECB to reduce the deposit rate to 2.5%, as the Governing Council is likely to conclude that the updated macroeconomic outlook necessitates a further easing of policy restrictions.
These anticipated rate cuts come amid a backdrop of weakening economic activity in the euro area, with real GDP growth at just 0.1% in the fourth quarter of 2024, missing the ECB's December forecast of 0.2%. High-frequency indicators signal continued sluggishness, though Barclays does not foresee an imminent recession. Meanwhile, the inflation outlook remains largely stable, with Barclays expecting the ECB to revise headline inflation slightly higher for 2025, at 2.2%, but keep projections for 2026 unchanged at 1.9%.
In summary, while recent fiscal measures in Europe have alleviated some downward pressure on the euro, Barclays maintains a cautious stance on the currency's rally potential. The bank also highlights the likelihood of forthcoming ECB rate cuts in response to subdued growth prospects, advising investors to consider these factors when making currency and investment decisions.
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