EUR/USD: What to Expect from the Euro and Dollar in 2024

EUR/USD: What to Expect from the Euro and Dollar in 2024

Reading time: 6 minutes

Two of the most widely traded currencies globally, the euro (EUR) and the US dollar (USD), combine to form the EUR/USD currency pair, a widely popular market for Forex traders and investors, as well as analysts and economists. Annual forecasts for this market, and most markets for that matter, are notoriously unbalanced; you will find that large commercial banks amend year-end forecasts regularly on the back of updated economic data and monetary policy, along with the ever-changing geopolitical climate and, for this year particularly, the US elections at the tail end of the year.

So, as of early February 2024, where is the EUR/USD exchange rate trading, and where is it likely headed over the coming months/quarters? 

Market Pricing?

With an interest rate cut narrative now underway (and rate hikes largely off the table), the question is which central bank is expected to cut first this year and by how many basis points (bps). For example, if forecasts for easing the Fed funds target range continue to be cut back as they have been, this could guide the US dollar higher and weigh on the euro, thus directing the EUR/USD lower by the year-end.

The Fed (Federal Reserve) has been on hold at 5.25%-5.50% for four successive meetings, while the ECB has had all three benchmark rates on hold for three consecutive meetings.

According to the market pricing, OIS forecasts nearly five rate cuts this year for the FOMC (Federal Open Market Committee), or around 114bps of cuts, while the European Central Bank (ECB) is expected to cut by around four times this year or 97bps. In terms of forecasts for the first 25bp rate cut, the FOMC (the ECB) is expected to make a show in June, though as of writing, there is around 70% probability (44% probability) that a 25bp cut could be seen in May. 

Brief Snapshot of Both Economies

While the US economy is clearly in a disinflationary phase and looking as though it is headed for a soft landing (since the mid-2022 peak of 9.1%, US CPI inflation has slowed to 3.4% in the twelve months to December 2023), the US recently experienced a jump in payrolls and robust wage growth, coupled with resilient economic growth. The beginning of February saw the release of the US Employment Situation Report, revealing a notable beat on US non-farm payrolls (NFP). The US economy added 353,000 new jobs to the economy, and the Q4 GDP advance report showed an annualised increase of 3.3%, backed by healthy consumer spending (helped, of course, by the jobs market).

In the euro zone, like the US, a disinflationary process has been seen since hitting 10.7% in late 2022. According to the Flash estimate released at the beginning of February, inflation eased slightly to 2.8% in the twelve months to January, down from 2.9% in December. However, it is a somewhat different landscape in the euro area in terms of GDP growth. Growth has been largely stagnating since the end of 2022, and a technical recession was narrowly avoided in Q4 of 2023, coming in flat (0.0%) as per the latest Flash figures (this followed a minor -0.1% fall in Q3 GDP). However, even with stagnant growth, the euro area unemployment rate is at a record low of 6.4%. 

Direction for the Euro to Dollar Exchange Rate?

Forecasts for the EUR/USD pair currently differ across major institutions.

For example, Citigroup and Société Générale are both bearish on the EUR/USD; the former forecasts the pair to touch $1.02 this year, while the latter is less bearish, targeting $1.05. ING Group and Bank of America, on the other hand, maintain a bullish view of the euro, both forecasting the EUR/USD to reach $1.15 at the year-end. 

Technical Analysis: Long-Term Monthly Chart

The overall technical position for the currency pair shows that the price has been in a bearish downtrend since mid-2008. The pullback from the late September lows of $0.9536 was greeted by sellers from resistance at $1.1233, which converged with the 50-month simple moving average at $1.1139. However, it is important to note that since the beginning of 2023, the EUR/USD has largely been rangebound between the resistance highlighted above and support from $1.0516. So, while a breakout on the downside is favoured according to trend studies, which could open things for a move to support from $0.9873, a break beyond resistance could see resistance enter the fold at $1.1606.