USD/EUR Forecast: Further Decline Expected
- and Eurozone interest rates reflects fundamental differences in fiscal policy and economic outlook.
- The U.S. Federal Reserve's bond-buying program, totaling $80 billion per month, is overshadowed by a projected $2.25 trillion net supply of U.S.
- The differing fiscal policies are the primary reason why the U.S.
The widening gap between U.S.adn Eurozone interest rates demands your attention: Fiscal policy and economic growth differences are the primary drivers. The U.S. benefits from important fiscal stimulus, while the Eurozone lags in disbursing its Next generation EU fund. This disparity dramatically impacts bond yields and currency valuations. The U.S. Treasury market anticipates record net supply, contrasting sharply wiht the European Central Bank’s bond purchases that surpass Eurozone issuance. This divergence is poised to impact the entire market. Strong U.S. economic data fuels growth, potentially leading to short-term rate spikes. At News Directory 3, we’re tracking how this influences the yield differential—forecasted to hit 225 basis points. Discover what’s next for this pivotal relationship.
Euro-U.S. Rates Divergence Widens Amid Fiscal Policy Differences
Updated May 28, 2025
A growing divergence between U.S. and Eurozone interest rates reflects fundamental differences in fiscal policy and economic outlook. While the U.S. benefits from multiple fiscal support packages, the Eurozone grapples with delays in implementing its Next Generation EU (NGEU) fund. This disparity impacts bond yields and currency valuations.
The U.S. Federal Reserve’s bond-buying program, totaling $80 billion per month, is overshadowed by a projected $2.25 trillion net supply of U.S. Treasuries in 2021.Private investors must absorb over $1.3 trillion of this supply. In contrast, the European Central Bank’s (ECB) bond purchases are expected to exceed the Eurozone’s net government bond issuance, particularly for German bunds, where ECB buying could surpass supply by more than €100 billion this year. This difference in supply dynamics contributes to the widening rates divergence.
The differing fiscal policies are the primary reason why the U.S. and Eurozone government bond markets face materially different backdrops in terms of net issuance.The U.S. Treasury market sees a record net supply this year,while the Eurozone has seen less forceful fiscal response.
This rates divergence is also evident in supply dynamics. The U.S. Treasury net supply could climb to new highs this year.
The yield differential between U.S.Treasuries and German Bunds is forecast to reach 225 basis points by year-end, up from 200 basis points. Strong U.S. economic data is expected to solidify growth and inflation expectations,possibly causing a near-term spike in rates. The U.S. growth story is a medium-term dynamic, with 3% U.S. yields a distinct possibility next year as our economics team forecasts inflation to average 2.9% in both 2021 and 2022.
what’s next
As the EU vaccination campaign accelerates and the NGEU fund begins disbursing in the second half of 2021, optimism may return to EUR rates, potentially influencing the rates divergence. However, for now, the U.S. economy’s robust growth and fiscal support continue to drive the wedge between U.S. and Eurozone interest rates.