ECB cuts rates as Eurozone inflation slows
The EUR/USD pair appreciated by +0.44%, from 1.1347 to 1.1397 this week.
Eurozone inflation stood at 1.9% in May, after 2.2% in April. This finds origin in decreasing energy prices and the Euro's appreciation against the Dollar. The European Central Bank (ECB) decided this week to reduce its deposit facility rate by -25 BPS to 2.00%. This is the 8th cut of the deposit facility rate since June 2024, i.e. a cumulative decrease of -200 BPS. Following this decision, the President of the ECB stated that this would end a year-long monetary easing cycle. The ECB considers inflation is under control but is concerned about the economic outlook amid uncertainty due to trade tensions.
USD/MAD at lowest level since late 2021
The USD/MAD pair depreciated -0.90% to 9.16 this week, its lowest level since late 2021.
This evolution was driven by a double negative effect in favor of the Dirham. A negative basket effect of -0.43%, after the Dollar's depreciation against the Euro this week. The liquidity effect, meanwhile, stood at -0.47%, reflecting the improvement in the Dirham's liquidity conditions.
The Dirham's liquidity spreads thus eased by -47 BPS, still to more than a 3 year low, at -4.82%, thanks to lower import flows following energy prices decrease. These levels are getting close to the lower band of the Dirham's fluctuation band, i.e -5.0%.
Foreign exchange market impacted by global trade tensions
Uncertainties related to trade tensions, particularly between the United States and its main trading partners (China and the EU), persist and fuel concerns about global economic growth and FX markets volatility.
As such, significant volatility is expected in the ST. We recommend traders to hedge their transactions over time horizons from 1 month to 3 months.
EUR/USD forecast remains stable among brokers
Brokers' forecasts for the EUR/USD pair were stable this week. The pair is expected to reach 1.14 in Q3-25 and then 1.15 in Q4-25. It is expected to rise to 1.16 in Q1-26 through Q2-26 before rising to 1.18 in 2026 and 2027. In 2028, it is expected to reach 1.19, compared to 1.18 a week earlier. In 2029, the target is 1.18.
US and Eurozone monetary policies in focus
In the United States, the PCE Core Index stood at 2.5% in April, in line with the consensus. In the face of persistent uncertainties related to trade tensions, the Fed decided a monetary pause in May, and Fed Fund rates remain within the range [4.25% - 4.50%]. Markets have shifted their expectations for the next rate cut to September instead of June. They currently anticipate a cumulative rate cut of -50 BPS by the end of 2025.
In May, inflation fell to 1.9% in the Euro Zone, below the ECB's target of 2%. The ECB therefore decided to reduce its deposit facility rate by -25 BPS to 2.00% in June. In July, markets are expecting a monetary pause, and a final interest rate cut is still likely in December. This is supported by the disinflationary outlook driven by decreasing energy prices and the appreciation of the Euro, which is making imports cheaper. The ECB is now focusing on economic growth, taking into account the negative impact of uncertainties related to the risks of a trade war.
Foreign exchange market – revised targets for USD/MAD and EUR/MAD
Given the EUR/USD exchange rate forecast and liquidity conditions in the foreign exchange market, we have reviewed our USD/MAD exchange rate forecasts downwards for the 1-month and 2-month horizons.
Brokers' EUR/USD exchange rate forecasts still favor a depreciation of the Euro against the Dollar over the 3-month horizon.
MAD liquidity spreads are expected to narrow very slightly against spot levels over the 1-month horizon and stabilize at these levels over the 2-month and 3-month horizons.
Under these conditions, the target levels for the USD/MAD exchange rate are 9.30; 9.30 and 9.30 over the 1-month, 2-month, and 3-month horizons, compared to a spot rate of 9.16.
The target levels for the EUR/MAD exchange rate are 10.37; 10.37 and 10.37 at 1-month, 2-month and 3-month horizons against a spot price of 10.45.
