Europe's economy has slowed under high-interest rates in 2023 and is likely to have additional challenges in 2024. Here is Pangea's technical EURUSD forecast & analysis:
The euro spent 2023 seesawing within a wide range as the dollar consolidated its historic gain from 2022. The primary force that drove the dollar rally was the US central bank’s aggressive increase in interest rates to curb inflation. With inflation receding globally, markets are now anticipating interest rate cuts from the major central banks. According to the CME Group Fedwatch tool it is likely that the FOMC will lower rates as soon as March, and it is expected that other central banks (including the European Central Bank) will follow suit.
Forex traders and market followers know that FX pairs express the relative value of one currency against another. Picking which currency will gain at the expense of the other is very often a matter of a choice between two inherently flawed entities. A well-known adage in FX says that “trading currencies is like choosing the cleanest shirt in a bag of dirty laundry”. So, will the euro turn out to be that cleanest shirt, or will the dollar and other currencies prevail in 2024?
Current State of the European Economy
- Growth: The eurozone economy experienced near-zero growth in the third quarter of 2023, contracting 0.1% compared to the previous quarter. This stagnation occurred despite expectations of a moderate rebound, highlighting the fragility of the recovery.
- Inflation: Inflation has receded with the latest report showing an annualized rate of 2.9%. While still above the stated target of 2%, it represents a big drop from the year-ago level of over 10%.
- Unemployment: The unemployment rate in the eurozone is at a record low of 6.5% as of October 2023. Though good by European standards, it is still much higher than the US where unemployment is under 4%.
- Fiscal policy: Governments across Europe are facing challenging fiscal situations. Public spending to mitigate the effects of the pandemic and the war in Ukraine has led to higher budget deficits and debt levels. This has raised concerns about the long-term sustainability of public finances.
What’s Next for the Euro: Forecasting
The euro’s 2024 trajectory will largely depend on the eurozone’s economic performance compared to other major economies. During the last 20 years, the euro (EURUSD) has fluctuated from a low of 0.96 to a high of 1.60, with an average price of approximately 1.24. Its current level of 1.08 implies that it is undervalued compared to its historic average.
The euro is unique among major currencies in that it is a single currency used by 20 countries. Managing the needs of 20 disparate economies has always been challenging for the European Central Bank, and the system has experienced regular periods of stress due to differing economic conditions in the member states. This situation makes monetary policy difficult since there is rarely a “one size fits all” solution. ECB President Lagarde will have to navigate the complexities of trying to control persistent inflation while maintaining economic growth in all EU countries.
The European economy (GDP) is expected to grow 1.6% in 2024, while the US will likely expand 2.1%. The stronger US economy means that US interest rates should remain at higher levels than those in Europe. This is a major factor in keeping the dollar strong against the euro.
The relative strength of the US economy should cause a weakening in the euro, but other factors could affect the exchange rate. Any expansion of the Ukraine conflict, especially if other European countries become involved, could lead to FX market flows out of the euro. Higher energy prices could also weigh on the euro. Conversely, if oil and natural gas prices drop, that would most likely benefit the euro.
Technical Picture of Euro: Technical Analysis
2023’s range in EURUSD shows the lowest volatility since 2019. Factors such as the pandemic, the Ukraine crisis, and global inflation contributed to bigger swings in the period from 2020 through 2022.
Analysts at major financial institutions have mixed assessments for EURUSD forecasts in 2024. Most expect a modest rise over the year. Morgan Stanley and Deutsche Bank forecast a year-end price of 1.15, while Bank of America expects the pair to end at 1.10. Few expect dramatic movement, with many predicting prices to be contained by 2023’s range of 1.0444 to 1.1275. A breakout above or below that range would imply a test of longer-term support or resistance areas shown in this chart:
Pangea believes that the most likely outcome in 2024 will be a gradually weakening EURUSD as the US economy outpaces the eurozone throughout the year.
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