European interest rate cut, Euro expected to fall by 7%, not far from parity with the US dollar?

Due to the sluggish market growth and cooling inflation in Europe, it is widely expected that the ECB will cut interest rates by 25 basis points this week.

Morgan Stanley predicts that as the ECB intensifies rate cuts to address economic recession, and the November US election may boost the US dollar, the euro is expected to depreciate to 1 euro to 1.02 US dollars by the end of this year.

Decline in German Inflation Paves the Way for Rate Cuts

The latest data shows that due to the fall in energy prices, Germany's inflation rate in August dropped to 2.0%, hitting a three-year low.

Compared to other EU countries, Germany's consumer price index rose by 2.6% year-on-year in July, while the core inflation rate excluding food and energy price fluctuations slightly decreased from 2.9% in July to 2.8% in August.

Energy prices in Germany in August fell by 5.1% compared to the same period last year. Meanwhile, food prices continued to rise for the fifth consecutive month, and service prices rose by 3.9% year-on-year in August.

Analysts believe that the decline in German inflation undoubtedly injects confidence into the ECB's rate cut. Morgan Stanley expects the ECB to continue cutting rates at the next three meetings and may significantly reduce by 50 basis points.

Morgan Stanley Forecasts: Euro to Depreciate Significantly Against the Dollar

Based on this, Morgan Stanley predicts that by the end of this year, the euro will depreciate to 1 euro to 1.02 US dollars, a depreciation of about 7% from the current level.

While the market generally expects the euro to appreciate to 1.11 US dollars by the end of this year, traders are closely watching the ECB's meeting on Thursday for a 25 basis point rate cut, with a focus on the outlook for the coming months.

David Adams, FX strategy director at Morgan Stanley's G10 Group, believes:

There is enough room in the market to reconsider the possibility that the ECB's rate cut may be deeper and faster than currently priced in, and this week's meeting may be an important catalyst for them.

Currently, the currency market is betting on a rate cut of about 60 basis points in Europe this year, while the US is expected to cut rates by about 110 basis points.

Analysts point out that traders may increase their bets on the ECB's rate cut to hedge against the risk of a 50 basis point cut. Option traders are less optimistic about the euro's outlook.

It is worth noting that Morgan Stanley analyst Adams also believes that the November US election may boost the US dollar, while the increasing political uncertainty in Europe further strengthens his bearish view on the euro:

"At a time of slowing economic growth, political risk premiums and uncertainty are rising, both of which suggest that investors may be less willing to deploy capital in the region."

As of now, the euro against the dollar is at 1.1, down by 0.01%.