07:25 AM EST, 11/15/2024 (MT Newswires) -- EUR/USD broke below the 1.0500 level on Thursday for the first time since October 2023 as the US dollar's (USD) positive momentum continued to drive the USD stronger against most currencies, said MUFG.

However, that break below 1.0500 was very brief and prompted a turnaround that lasted throughout the remainder of Thursday and into Friday, wrote the bank in a note to clients. EUR/USD has now dropped 7-big figures in a little over a month and markets may be reaching a point when the positive momentum fades and better two-way flow begins to emerge into the market.

MUFG's sense is that levels around or certainly below 1.0500 would be viewed as attractive buying levels for those who have EUR buying requirements. Given the speed at which this level has been hit, the bank may now start to see some better EUR demand.

The minutes from the European Central Bank policy meeting in October didn't offer any big surprises relative to the outcome of the meeting and the communications from ECB President Christine Lagarde, stated MUFG. The October meeting marked the first back-to-back cut and that was down to the better-than-expected progress on inflation which was clearly outlined in the minutes on Thursday.

There was also a reference to an inflation undershoot which given the scale of the recent decline of inflation ahead of the meeting isn't a surprise.

The minutes also noted that the inflation undershoot could be assessed in more detail when the staff economic projections would be released in December. However, these minutes are from a meeting that took place ahead of the United States presidential election and as such the details of the minutes need to be caveated as being somewhat dated, pointed out the bank.

A rate cut is still likely in December and is fully priced by the markets but the communications on future moves will be likely more balanced. The new projections won't be able to take account of future possible policies as markets will only know them next year but inflation risks are already higher.

EUR/USD was trading close to the 1.1200 level when the meeting took place in October and the projections were based on a spot rate around that level too. EUR/USD since then is between 6-7% lower which alone will have a small bearing on inflation projections. Retaliatory tariffs in 2025 while won't be forecasted in the projections in December will be a risk factor that will make the ECB much more cautious on forward guidance, added MUFG.

The current divergence in rate-cutting expectations between the Federal Reserve and the ECB over the next 12 months looks excessive to the bank. The Fed is priced to cut by nearly 65bps by next October but the ECB will cut by double that -- nearly 150bps.

MUFG sees risks of the ECB delivering less than priced. Weak growth didn't get much focus when the ECB was hiking in 2022-23 and weak growth in 2025 will equally take a back-seat in circumstances of increased inflation risks related to incoming President Donald Trump's trade policies and Europe's inevitable retaliation.