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EUR/USD Price Forecast For 2024 – The Test Of 1.1500 Is Possible As Fed Starts Cutting Rates

By:
Vladimir Zernov
Updated: Dec 29, 2023, 19:05 UTC

The dovish Fed is bearish for U.S. dollar, but Europe's economic problems limit potential upside for EUR/USD.

EUR/USD

In this article:

Key Insights

  • EUR/USD is moving back towards the 2023 highs as traders prepare for Fed rate cuts in the first half of 2023.
  • The technical setup looks promising as EUR/USD may settle above the 200 MA on the weekly chart. 
  • However, it will be hard to establish a bullish long-term trend due to the problems of the European economy. 

2023 Market Review

EUR/USD
EUR/USD Daily Chart

In 2023, EUR/USD dynamics were driven by the changes in Fed policy outlook. Starting the year near 1.0600, EUR/USD touched highs at 1.1275 in July. At that moment, traders have started to worry about additional rate hikes from the Fed.

These worries pushed Treasury yields towards multi-year highs. The yield of 2-year Treasuries was 5.26% at the peak, while the yield of 10-year Treasuries reached 5.02%. High Treasury yields boosted demand for U.S. dollar and pushed EUR/USD towards 1.0450.

During the last quarter of 2023, traders have started to prepare for a more dovish Fed. In December, Fed’s rhetoric has become dovish, and traders focused on potential rate cuts in the first half of 2024. These expectations pushed EUR/USD towards the recent highs at 1.1139.

From a big picture point of view, EUR/USD was range-bound, so buying dips and selling rallies was a good strategy for traders.

Economic Outlook in the Eurozone and US

The economic data from the Eurozone remains disappointing. According to the flash readings of the Eurozone PMI reports, Euro Area Manufacturing PMI declined from 44.6 in November to 44.1 in December, while Euro Area Services PMI decreased from 48.7 to 48.1. Numbers below 50 show contraction.

IMF expects that the Euro Area economy would grow by 1.2% in 2024, but it remains to be seen whether this forecast is realistic as the manufacturing sector is under strong pressure.

In the U.S., the economic data is more optimistic. Manufacturing PMI declined from 50.5 in November to 49.0 in December, but Services PMI increased from 50.8 to 51.3. The strong services sector continues to provide material support to the U.S. economy.

In 2024, the Fed is expected to start cutting rates, and it looks that U.S. will avoid a recession despite the gloomy forecasts from the early 2023. Overall, the U.S. economy is in a better shape compared to the European economy.

Monetary Policies and Central Banks

FedWatch Tool indicates that there is a 70.1% probability that Fed will cut the federal funds rate by 25 bps in March 2024. The federal funds rate is expected to decline from the current 525 – 550 bps to 375 – 400 bps by the end of 2024.

These aggressive rate cut expectations have put pressure on the U.S. dollar in recent months. In case investors see that inflation is not trending lower at a robust pace, these expectations would change, putting pressure on EUR/USD.

ECB is also expected to cut rates in 2024. However, markets believe that ECB will prefer to wait until the second half of the year before starting to cut rates. These expectations are bullish for EUR/USD as Fed is expected to start cutting rates earlier than ECB.

It remains to be seen whether weak economic data will have any impact on ECB decision making as it looks that the European Central Bank is worried that cutting rates too early would bring back inflation.

Political Climate

U.S. presidential election is the key political event for EUR/USD traders in 2024. Everything else pales in comparison with the upcoming drama. While the election is scheduled for November 5, 2024, the impact of the presidential race would be felt throughout the year.

In 2024, it would be hard for Republicans and Democrats to reach consensus on any topic as their decisions would impact the outcome of the upcoming elections. Thus, we can expect last-minutes attempts to avert government shutdown and other dramas that will lead to volatility in EUR/USD trading.

Geopolitical Tensions and Global Trade

Geopolitical tensions will remain the key catalyst for the Euro Area amid Russia-Ukraine conflict. The European economy remains under pressure due to the negative consequences of the conflict, including the loss of cheap Russian energy.

An additional escalation of tensions may have a significant impact on the European economy and put more pressure on the euro. The good news for the euro bulls is that additional escalation implies some form of direct conflict between NATO and Russia, which is a low-probability scenario.

Talking about global trade, all eyes are on Israel-Hamas conflict. Houthis continue to attack ships, but it remains to be seen whether these attacks will lead to significant supply disruptions. Europe is more dependent on the Suez Canal route, so any escalation would put more pressure on the European economy.

All in all, various geopolitical scenarios present more risks for Europe than for the U.S. in 2024. These risks may limit upside for EUR/USD in case Fed starts cutting rates aggressively as traders will also focus on Europe’s economic problems.

Market Sentiment and Investor Behavior

Currently, the global market sentiment remains bearish for the U.S. dollar due to expectations of Fed rate cuts. However, any changes in Fed policy outlook will have a significant impact on EUR/USD dynamics.

Interestingly, the problems of the European economy and the geopolitical risks faced by the EU, including the potential esclation of tensions in Red Sea, are mostly ignored by traders who believe that ECB would not rush to cut rates.

Thus, EUR/USD may be extremely sensitive to events that fall outside of the base case scenario.

TA Forecast for 2024

EUR/USD
EUR/USD Weekly Chart

Taking a look at the weekly chart, EUR/USD is moving towards the 200 MA near the 1.1200 level.  A move above the 200 MA will signal that EUR/USD is ready to gain additional upside momentum.

From a big picture point of view, EUR/USD is heading towards the high end of the long-term channel. As the Fed will likely cut rates faster than ECB, EUR/USD may move towards the high end of this channel. For a example,  a test of the 1.1500 level looks plausible.

At the same time, it remains to be seen whether EUR/USD may get out of this long-term trend and establish a new bullish trend given the problems of the European economy.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

Vladimir is an independent trader and analyst with over 10 years of experience in the financial markets. He is a specialist in stocks, futures, Forex, indices, and commodities areas using long-term positional trading and swing trading.

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