Euro Declines as ECB Cuts Deposit Rate to 3.0%; BNP Paribas Predicts Parity by End of 2025

Following the European Central Bank's (ECB) decision to cut interest rates by 25 basis points, the euro depreciated, reaching its lowest level in nine days. This move reduced the deposit rate to 3.0%.

The ECB also indicated the possibility of further rate cuts in the future, aligning with expectations for a gradual approach to achieve the medium-term 2% inflation target. The Central Bank's statement highlighted that the economic recovery is happening at a slower pace than previously anticipated, emphasizing that monetary policy will remain restrictive.

Despite this, the ECB reiterated its commitment to a data-driven and meeting-by-meeting approach, avoiding any prior commitments to a specific rate path. Following the announcement, the euro fell from the pre-cut level of 1.0488 dollars to 1.0470 dollars.

The limited decline in the euro's value may be attributed to the markets anticipating a larger cut of 50 basis points. Simultaneously, the attractiveness of the U.S. dollar has strengthened due to its safe-haven status and higher yield expectations. Chris Turner, ING's global head of markets, noted in a report that the bank continues to prefer the U.S. dollar for these reasons.

The dollar maintained its strength throughout December as the U.S. trading partners, including the Eurozone, prepared to rapidly cut interest rates. According to ING, the DXY dollar index, which fell to 106.581 after a 0.1% drop, has the potential to rise toward 107 if the ECB signals further rate cuts ahead.

In a separate forecast, BNP Paribas Markets 360 anticipates that the euro's decline against the dollar will continue, predicting parity by 2025.