06:42 AM EST, 01/23/2025 (MT Newswires) -- The euro has strengthened in recent weeks against both the US dollar and sterling, resulting in EUR/USD climbing back above 1.0400 and EUR/GBP up to 0.8450, wrote Mitsubishi UFG in a note to clients.

The moves have been driven more by the reversal of the dollar and selling gains rather than by positive euro fundamental drivers.

Market participants are less concerned over the immediate risk of higher tariffs being put in place by the United States against the Euroepan Union, while the unease over rising Gilt yields temporarily undermined the attractiveness of the yield pick-up in the United Kingdom that encouraged EUR/GBP to trend lower throughout last year, stated MUFG.

Comments from European Central Bank officials in recent days have indicated that on the whole, they continue to favor further rate cuts at the start of this year. A view shared by the eurozone rate market that is currently pricing in between 75bps-100bps of further rate cuts by the middle of this year, pointed out the bank.

It stands in contrast to market expectations for more cautious rate cuts for the Federal Reserve. The U.S. rate market is only fully pricing in one further 25bps rate cut from the Fed by the summer, pointed out MUFG.

With U.S. employment growth picking up in recent months and the Fed wanting more time to see how President Donald Trump's policy plans are likely to impact the outlook for the U.S. economy, the Fed has already adopted a more cautious approach to delivering further rate cuts.

Widening policy divergence between the ECB and Fed should keep downward pressure on EUR/USD at the start of this year, and is another reason why the bank believes further upside for the pair should prove limited.

ECB President Christine Lagarde stated Wednesday that she was "confident that inflation will be at target in 2025" and that the disinflationary process is continuing. When it came to assessing the risk to growth and inflation she added that judges that risks are to the downside for growth this year in the eurozone, and she isn't overly concerned over any inflation exported from the U.S.

The outlook continues to favor further gradual rate cuts in Lagarde's view. A view that was backed up by Bank of France Governor Francois Villeroy de Galhau who stated Wednesday that it's plausible for rates to be around 2% in the summer.

ECB Governing Council member Klaas Knot added as well that current market expectations for 25bps cuts in January and March are reasonable. Knot is comfortable with the policy rate moving to more neutral levels but isn't yet convinced that "we need to go into stimulative mode."

The comments fit MUFG's forecasts for the ECB's policy rate to fall to 2.00% by the summer and then stay at the level during the second half of this year.