Policy divergence and FX volatility is set to be a key theme for 2025: Barclays

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

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 in a bid to contain the Swiss franc’s appreciation.

The Fed will meet next week in what will be the last key policy event of 2024 for global markets. Barclays economists expect the US central bank to deliver another 25 bp cut, but are less certain about the rate path next year, given sticky inflation and the potential impact of “Trumponomics.”

Barclays anticipates the Fed will implement only two more 25-basis-point cuts, which would bring the federal funds rate to 4% by year-end. However, the bank’s rates strategist warns that the market might have been overly optimistic in dismissing rate cuts in recent weeks.

“Still, a total of 75bp more cuts in US by end of ’25 compares to our expectation for ECB to cut 150bp to 1.5% by then,” Barclays strategists led by Emmanuel Cau said 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 bodes well for dollar earners, they added.

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

Meanwhile, incremental stimulus in China remains likely, which could provide some additional support to EU exporters.