Policy Divergence and FX Market Volatility in 2025

Investing.com — Policy divergence between the Federal Reserve and European Central Bank (ECB), along with volatility in the foreign exchange (FX) markets, is expected to be a key theme for 2025, according to Barclays (LON:BARC) strategists.

Central Bank Actions

The ECB slashed interest rates by 25 basis points (bps) on Thursday and indicated further gradual, data-driven easing into 2025. Meanwhile, the Swiss National Bank (SNB) announced a jumbo 50 bp cut to contain the Swiss franc's appreciation.

The Fed is set to meet next week for the last major policy event of 2024 for global markets. Barclays economists anticipate another 25 bp cut from the US central bank, but express uncertainty about the rate path in the following year due to persistent inflation and the potential impact of "Trumponomics."

Rate Cut Expectations

Barclays expects the Fed to implement only two more 25-basis-point cuts, bringing the federal funds rate to 4% by year-end. However, the bank’s rates strategist warns that the market might be overly optimistic in dismissing rate cuts recently.

> “A total of 75bp more cuts in the US by end of '25 compares to our expectation for the ECB to cut 150bp to 1.5% by then,” stated Barclays strategists led by Emmanuel Cau in a note.

EUR/USD Outlook

While some of this rate differential might already be reflected in market pricing, Barclays' FX strategists believe it may be sufficient to maintain a negative asymmetry for EUR/USD. This asymmetry is seen as beneficial for dollar earners.

A weaker euro may also positively influence EU earnings, as relative earnings per share (EPS) revisions between Europe and the US are inversely correlated with EUR/USD movements. This provides a potential silver lining for Europe amidst weak domestic demand.

Chinese Stimulus

Additionally, incremental stimulus in China remains likely, which could offer some extra support to EU exporters.