As 2024 began, EUR/USD traded around 1.1 and fell to an exchange rate of 1.07 as of April 2024. However, analysts predict a short-term bullish divergence for the pair amidst the US's rate cuts and economic slowdown, with a 58.3% chance of recession in the coming year.
Let’s look at the 2024 predictions for the EUR/USD pair.
Analysts suggest EUR/USD could fall to parity
While the possibility of EUR/USD hitting parity is not widely anticipated, factors such as diverging policy rate spreads and energy price fluctuations pose risks. Analysts highlight that despite these, the Eurozone's improved terms of trade from low gas prices could mitigate prolonged lows for EUR/USD. However, UBS warns that rising funding costs, higher energy costs, and potential US tariffs under a Republican presidency could increase the likelihood of a medium-term test of parity.
Attention shifts to the Federal Reserve's potential rate cuts in 2024, with speculation on whether Jerome Powell's actions cater to Wall Street's appetite for cheap money or reflect concerns about the economy's underlying health. While one scenario suggests asset inflation and a weaker Dollar, another indicates underlying economic weakness, especially in rising credit card defaults and ‘buy now, pay later’ trends in the US consumer market, possibly signaling a recession, as per CNBC.
There might be a short-term upward correction in EUR/USD
The EUR/USD may experience a short-term upward correction amidst Joe Biden's presidency, reduced tension in financial markets, and constructive trade negotiations, which has diminished the demand for the US Dollar. This could result in temporary EUR/USD appreciation. Additionally, The US Fed's rate cuts have influenced EUR/USD quotes (depreciating the USD), redirecting investors to other Asian currencies.
An extended bullish divergence only till July 2024 as per Nasdaq
Extended bullish divergence is expected in EUR/USD until July 2024, according to Nasdaq, as traders are anticipating Fed rate cuts in the first half of 2023, which is driving EUR/USD back towards 2023 highs.
Throughout 2023, EUR/USD dynamics were influenced by shifts in the Fed's policy outlook, with concerns about additional rate hikes initially pushing the pair lower before expectations of rate cuts in 2024 boosted it back up. Economic data from the Eurozone continues to disappoint, while the US economy shows more optimism, as mentioned by Nasdaq analysts.
Fed rate cut expectations have pressured the US Dollar, while the ECB is also expected to cut rates in 2024. Geopolitical tensions, particularly the Russia-Ukraine conflict, and global trade disruptions remain concerns for Europe. Despite bearish sentiment towards the US Dollar, EUR/USD may face limitations in its upside potential due to Europe's economic challenges.
EUR/USD could settle above its 200-day MA
The potential for the EUR/USD pair is to surpass its 200-day moving average (MA) on the weekly chart, as per Nasdaq. However, challenges in establishing a sustained bullish trend arise from the ongoing economic issues in Europe. As markets anticipate aggressive rate cuts by the Fed, with a 70.1% probability of a 25-bps reduction in March 2024, pressure mounts on the US Dollar, potentially impacting EUR/USD dynamics to depreciate.
Similarly, expectations of ECB rate cuts in 2024, albeit likely in the latter half of the year, bolster optimism for EUR/USD, particularly as the Fed is expected to act sooner. However, uncertainties persist regarding whether EUR/USD can break out of its long-term trend and establish a new bullish trajectory.
ECB cutting rates in late 2024 might signal optimism
The European Central Bank (ECB), in its recent announcement, maintained interest rates but signaled a potential rate cut soon. The ECB's statement highlighted its readiness to reduce current monetary policy restrictions if inflation trends toward its 2% target persist. ECB President Christine Lagarde emphasized the significance of this indication, stating it as a clear shift in the bank's stance to appreciate its currency, the Euro, amidst the economic slowdown.
Market expectations point towards a possible rate cut in June 2024, following a downward revision of medium-term inflation forecasts and cooling price rises in the Eurozone. However, the ECB's decision-making may be influenced by developments in the US, particularly regarding inflation and the Fed's policies.
Political tensions could complicate the EUR/USD landscape
2024 presents several important political events, including parliamentary and presidential elections across several Eurozone nations, which could complicate EUR/USD growth.
Moreover, internal debates, such as the one surrounding Germany's debt brake, underscore the complexities of balancing economic recovery with long-term sustainability goals. Market expectations anticipate multiple rate cuts in 2024, reflecting concerns over slowing economic growth and persistent inflationary pressures.
However, the EUR/USD pair outlook remains uncertain, with varying forecasts from major financial institutions. While some, like Bank of America, predict a bullish trajectory for the Euro against the Dollar, citing potential Fed rate cuts and undervaluation of the currency pair, others, such as Citigroup, remain cautious, foreseeing continued economic weakness in Europe.
UBS has predicted EUR/USD to be around 1.12
According to UBS, EUR/USD is forecasted to trade around 1.12 in 2024 amidst economic uncertainty and geopolitical instability. The report emphasizes three key insights for the year ahead:
- Expectations of slower growth in the US
- Subdued European growth
- China’s transition to a new normal of lower but potentially higher quality growth.
With central banks anticipated to begin rate-cutting cycles, political events such as the US elections and ongoing geopolitical tensions will significantly influence the currency pair to either rally or break significantly. The report also presents various scenarios for the year ahead, ranging from a soft landing to a hard landing or even a liftoff, underscoring the importance of vigilance and flexibility in navigating the evolving economic landscape.
What is in the market for EUR/USD for the rest of 2024?
EUR/USD faces uncertainties in 2024 amid diverging monetary policies, geopolitical tensions, and economic challenges. While some forecasts suggest a potential increase in EUR/USD, supported by factors like Fed rate cuts and geopolitical calm under Biden's presidency, others anticipate a decrease, citing USD strength due to high US yields and risk aversion episodes.
It's essential for traders to remain cautious and adaptive, closely monitoring market developments and adjusting strategies accordingly. Whether EUR/USD rallies, declines, or stabilizes, the key takeaway is the importance of staying informed, prudent, and prepared for various scenarios in the ever-evolving economic environment.
