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ECB Interest Rate Expectations: The ECB is expected to cut the deposit rate by 25 basis points to 2.75% on January 30, 2025, adopting a data-dependent approach without committing to a specific future path. UBS anticipates additional cuts in March, April, and June, potentially bringing the terminal rate to 2%, given upside risks to growth.

Eurozone Inflation and Growth: December 2024 inflation rose to 2.4% year-on-year (core 2.7%), with forecasts for a deceleration to around 2% in Q1 and stabilization near 2.2%. Services inflation is expected to moderate, allowing policymakers to focus on downside growth risks, such as tighter labor markets and rising concerns over unemployment.

FX Strategy: UBS is bearish on EUR/USD, predicting it may reach 0.97 by end-2025, driven by USD strength from Trump policies and potential US tariffs. ECB policy is likely a secondary focus amid political uncertainty.

Market vs. UBS Views: Markets price in approximately 98 basis points of ECB cuts in 2025, below recent weeks' pricing, but UBS argues the influence of Fed policy is overstated. Deeper cuts are possible if growth risks materialize.

Fiscal and Growth Risks: Potential US tariffs on Eurozone exports could exacerbate economic risks, potentially prompting a dovish ECB stance. Eurozone fiscal scenarios, such as unexpected German election outcomes, could also weigh on the EUR.