Investing.com – Key Themes for 2025

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

The ECB recently reduced interest rates by 25 basis points (bps) and signaled the possibility of further gradual, data-driven easing into 2025. In contrast, the Swiss National Bank (SNB) announced a notable 50 bps cut to mitigate the appreciation of the Swiss franc.

Next week, the Fed will convene for its last pivotal policy event of 2024 in global markets. Barclays economists anticipate that the US central bank will implement another 25 bps cut, although they express uncertainty about the rate trajectory next year due to persistent inflation and the implications of 'Trumponomics.'

Barclays predicts that the Fed will initiate only two additional 25-basis-point cuts, ultimately lowering the federal funds rate to 4% by the end of the year. However, the bank's rates strategist warns that market expectations for rate cuts might be overly optimistic in recent weeks.

"Still, a total of 75 bps more cuts in the US by the end of 2025 compares to our expectation for the ECB to cut 150 bps to 1.5% by that time," said Barclays strategists led by Emmanuel Cau in a note.

"Although some of this rate differential is arguably reflected in market pricing already, our FX strategists believe that it should be enough to maintain a negative asymmetry for EUR/USD."

This asymmetry is considered favorable for dollar earners. Barclays also highlights that a weaker euro could benefit EU earnings, noting that relative earnings per share (EPS) revisions between Europe and the US move inversely with EUR/USD fluctuations. This scenario presents a potential silver lining for Europe, given the prevailing weak domestic demand.

In the meantime, additional stimulus in China seems probable, which could further support European Union exporters.