The EUR/USD pair had another difficult year in 2024, as it crashed by over 5.7% amid a strong divergence between Europe and the United States. On Monday morning, it was trading at 1.0427, down over 7% from its year-to-date high. This EUR to USD forecast explains why the pair may move to parity in 2025.
Europe and US divergence
Economic data released this year showed that the European and American economies have diverged.
The US economy is doing well, helped by strong government stimulus packages and private sector innovation. Estimates suggest that it will grow by 2.7% this year.
Europe, on the other hand, is no longer growing. The Autumn forecast suggested that the economy would grow by just 0.9% this year. Germany remains in a recession and has not grown in the past four years.
France is also not growing and is spending much more money than it collects in taxes, with the deficit standing at over 6% of the GDP.
There are risks that the European economy will continue struggling because it lacks any major competitive advantage. For example, the biggest shift is now happening in the automobile sector, where Chinese companies like Li Auto, Nio, and BYD are gaining market share domestically and internationally.
The disruption of the auto sector is a major thing for the European economy because it is the biggest employer in the region. This includes top companies like Mercedes-Benz, Stellantis, BMW, Volkswagen, and Renault.
Fed and ECB actions
Therefore, this divergence has continued in the monetary policy decisions of the Federal Reserve and the European Central Bank (ECB).
The Federal Reserve has delivered three interest rate cuts rates this year, bringing the total cuts to 1%. However, officials have pointed to a reduction in the number of cuts in 2025 because of the potential inflation risks.
The ECB has also slashed rates by 1%, hinting that more are coming. Analysts expect that the ECB will slash rates to 1% in 2025.
It hopes that lower interest rates will help to supercharge the economy by lowering the cost of borrowing for companies and individuals.
Therefore, the EUR/USD pair has crashed due to the divergence in interest rates between the Fed and the ECB.
There are also lingering risks about Donald Trump, who has threatened to restart his trade war as soon as he becomes president. He warned that he would impose more tariffs on European goods if the block refused to buy more energy from the United States. As a result, investors have moved to the safety of the US dollar.
EUR/USD technical analysis point to a crash below parity
The weekly chart shows that the EUR/USD pair has been in a strong downward trend in the past few days. This decline happened after it formed a double-top pattern around the 1.1200 level. A double-top is one of the most popular bearish signs in the market.
The pair has moved below the 50-week moving average and has even moved below the neckline at 1.0446. Therefore, the pair will likely continue falling in 2025, with the next point to watch being the parity level at 1.000, which is about 4.20% below the current level. If this happens, the next point to watch will be at 0.9535, its 2022 lows.
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