The European Central Bank has lowered interest rates for the third time this year, as inflation in the eurozone shows signs of easing and the economy struggles to regain momentum.
Thursday’s quarter-point rate cut brings the deposit rate down to 3.25%.
With money markets now expecting three more rate cuts by March 2025, the euro is likely to face prolonged downward pressure, according to the CEO of a leading independent financial organisation.
“This is the first time in 13 years that the ECB has delivered consecutive rate cuts, marking a pivotal moment for both the eurozone economy and global investors,” said deVere Group’s Nigel Green.
“Lower interest rates make a currency less appealing to investors as they reduce returns on assets denominated in that currency.
“As the ECB continues to signal further rate cuts, this trend is expected to intensify. The euro is likely to weaken as investors seek higher returns elsewhere, potentially leading to capital outflows from the eurozone.
“The ECB’s actions indicate a clear shift in focus, from managing inflation to stimulating growth.
“With continued rate cuts on the horizon, the euro is set to remain under pressure for the foreseeable future, making this a critical time for investors to assess their portfolios.”
Challenges
Green explained that for investors holding euro-denominated assets, a weakening currency could present some challenges, especially for those with international exposure. As the euro depreciates, returns on European investments could decline when converted back into stronger currencies.
However, there are also opportunities, particularly in export-heavy sectors, where a weaker euro makes European goods more competitive on the global market.
“In light of the ECB’s monetary policy approach, we recommend investors take a close look at currency risk and consider hedging strategies if they have significant exposure to the euro,” he said.
“On the other hand, sectors such as manufacturing and exports could benefit from a more competitive currency.”
For investors looking to take advantage of a weaker euro, diversification into eurozone industries that are less reliant on domestic demand and more focused on exports could prove beneficial. These industries are likely to see growth as their goods become more attractive on the international market, providing opportunities in the face of broader economic stagnation.
The deVere CEO concluded that, “investors should be prepared for sustained euro depreciation and adjust their strategies accordingly.
“The weakening euro could be a double-edged sword, offering opportunities in specific sectors while also requiring a more cautious approach to currency risk.”
