According to our assumptions, stimulus measures, immigration restrictions and tariffs should push up inflation, with the economy remaining close to full employment. However, tariff increases should remain below expectations, as tariff threats could be used mainly as a negotiating tool. European growth is at risk, but we do not expect any major changes in growth forecasts beyond 2025. We expect little impact on European inflation forecasts, which could even surprise on the downside.

Exchange rates and yield differentials

A key consequence of the US elections is that the Federal Reserve could interrupt the rate-cutting cycle earlier than expected, with inflation possibly rising by the end of 2025. In the short term, the Fed is unlikely to change its plan, as it makes its decisions based on economic data and does not speculate on the impact of the new president’s actions. We therefore believe that the plan to cut interest rates in December and at a quarterly rate for most of 2025 remains valid. However, we believe that the Fed will end its rate-cutting cycle in September 2025 with a key rate of 3.75%, i.e., two cuts of 25 bp less than in our previous scenario. In the eurozone, disinflation is well underway and economic growth is slowing. The likelihood of more cuts in key rates is therefore higher. We now expect an end-of-cycle rate of 2% (deposit rate) to be reached in September 2025, compared with 2.25% in our previous scenario.

As regards the longer-term interest rate, we have revised up our US targets in view of the inflation risk detailed above and the risk of increased fiscal spending leading to higher treasury bond issuance. The US 10-year yield (sovereign bond) should be around 4.25% in 12 months’ time. We have not changed our 12-month target for eurozone long-term interest rates. The yield on German sovereign bonds should stabilise at around 2.25% over the same period.

In addition, the new political environment in the US is improving the outlook for US equity markets, despite already high valuations. In our view, three key factors have the potential to boost US corporate profitability over the coming months:

1. The extension of the highly favourable corporate tax regime, and even further reductions in tax rates.

2. Deregulation.

3. The downward potential of oil and gas prices.

The increase in the expected yield differential in favour of the United States will provide significant support for the dollar over the coming months. We now see upside potential for the US currency over the coming year. However, we do not think that we will see parity again in 2025, but we could see a return to the 1.02 level (value of one euro).

This article was originally published in .