Over the past month, the world’s most significant currency pair, EUR/USD, has weakened by 2%. Could the monetary policies of central banks and disparities in economic strength push the pair below parity? Will Poland soon see the U.S. dollar priced higher than the euro?
The hawkish pivot by the Federal Reserve (Fed) has led to a marked strengthening of the U.S. dollar, which continues its rally across nearly every front. Meanwhile, the Eurozone faces various challenges, including economic slowdown, risks of rising inflation, and potential trade barriers under Donald Trump’s policies.
U.S. Economic Outlook: Resilience Amid Monetary Tightening
“The Fed has acted as expected, but the latest economic forecasts show that the U.S. economy will still see solid growth above 2%, a lower unemployment rate, and inflation at 2% in 2025,” says Michał Stajniak, Deputy Director of Analysis at XTB, in an interview with MarketNews24.
Fed members have adjusted their expectations, anticipating only two rate cuts in 2025 and one or two more in 2026. If economic data align with these forecasts, rate cuts may not occur until mid-2025. However, should Trump’s policies drive inflation higher—a plausible scenario—the Fed might forgo further rate reductions after completing three planned cuts in 2024.
Historical parallels, such as in 1996, 1998, and 2019, reveal that the Fed previously ended rate-cutting cycles without triggering significant financial market disruptions. The U.S. economy remains robust, likely sustaining growth above 2% without additional rate cuts.
Eurozone Struggles: Structural Weaknesses and External Risks
The Eurozone presents a stark contrast. Quarterly year-on-year growth above 1% was last seen in the second and third quarters of 2021, driven by a low base effect from 2020’s pandemic-induced contraction. Outside of this anomaly, growth above 1% per quarter hasn’t occurred since 2006. While annual growth figures appear less dire, the Eurozone remains weaker than the U.S.
The Eurozone faces further threats, including potential tariffs from Trump’s administration, which could severely impact European industries. A potential policy response could involve faster rate cuts, though this risks reigniting inflation. On a brighter note, falling fuel prices next year could help keep inflation in check.
Will EUR/USD Fall Below Parity?
If EUR/USD does breach parity, it could enhance the competitiveness of European exports. Paradoxically, this might not be an entirely negative outcome given the Eurozone’s current challenges. With EUR/USD already trading below 1.0400, parity is within reach.
“There are strong indications that EUR/USD could drop below parity again, as it did in 2022, when the dollar reached 5 PLN while the euro stood at 4.95 PLN,” Stajniak notes. “Although such extreme levels are unlikely, the dollar could still become more expensive than the euro in Poland.”
Currency Performance in 2024
The U.S. dollar leads gains in the FX market, with the British pound ranking second in nominal returns. Despite the ongoing rate-cutting cycle in the UK, the Bank of England’s cautious approach has supported the pound. Conversely, currencies like the Japanese yen and the Australian and New Zealand dollars have underperformed.
- Japanese Yen (JPY): The yen has weakened due to the Bank of Japan’s indecisive stance on rate hikes, with USD/JPY gaining nearly 10% in 2024.
- Australian (AUD) and New Zealand Dollars (NZD): Both currencies have struggled, with AUD/USD dropping 8.5% and NZD/USD plunging 11% this year, exacerbated by dovish central bank policies.
Polish Zloty Outlook: Stability Amid Regional Weakness
The Polish złoty (PLN) has demonstrated resilience compared to its regional peers, such as the Czech koruna and Hungarian forint, due to Poland’s relatively strong economic performance. Unlike these countries, Poland’s central bank (RPP) has refrained from rate cuts, a stance likely to persist in 2025.
“The złoty may weaken slightly against the dollar but should remain stable against the euro,” Stajniak predicts. “In early 2025, the dollar is unlikely to exceed 4.15–4.25 PLN, while EUR/PLN is expected to stabilize.”
Conclusion
As global monetary policies evolve, the dynamics between the U.S. dollar, euro, and other currencies continue to shift. While the Fed’s hawkish stance bolsters the dollar, the Eurozone grapples with structural and external challenges. For Poland, the złoty’s relative stability offers a buffer against more pronounced regional volatility. Whether EUR/USD parity is a curse or a boon will depend on how effectively Europe navigates its economic hurdles.
