Euro Trend Forecast 2024: Appreciating in the First Half, Facing Pressure in the Second Half

## What is the current situation of the euro?

Entering 2024, the EUR/USD exchange rate faces a dilemma. Although both the Federal Reserve and the European Central Bank are expected to cut interest rates, their pacing is not synchronized, which is the core driver of current euro volatility.

Federal Reserve official Waller recently stated that, due to strong economic activity and employment performance, and inflation gradually returning to the 2% target, there is no need to rush to cut rates. In contrast, ECB Governing Council member Simkus hinted that rate cuts might start in summer, but the magnitude is far less optimistic than market expectations. This misalignment in policy pace has directly led to rising yields on U.S. and German bonds, causing the euro and dollar to enter a consolidation phase.

## What happened to the euro last year?

To understand this year's trend, let's look at what happened in 2023. Last year, the euro appreciated only 0.36% against the dollar, and the underlying logic was quite simple—throughout the year, it was a game of "who raises rates faster and by how much."

Unexpected shocks like Silicon Valley Bank and Credit Suisse affected the exchange rate, but the most important factor was the comparison of inflation data between Europe and the U.S. If European inflation exceeds U.S. inflation, the probability and magnitude of ECB rate hikes increase, making the euro more likely to appreciate. In the fourth quarter of last year, the market began to price in a rate cut in the U.S., which was favorable for the euro in the short term.

## Will the euro fall in 2024? A comprehensive analysis from three perspectives

### How will the US presidential election year affect the euro?

The biggest political variable in 2024 is the U.S. presidential election, with Trump's candidacy again attracting market attention. Looking back at 2016, before Trump was elected, the EUR/USD mostly declined; after the election results were confirmed, the decline accelerated, and it only recovered in 2017.

Why is this? During election years, candidates promise policies that are most beneficial to the U.S. economy, making the market particularly optimistic about the dollar. But after the election and inauguration, these "big promises" either cannot be fulfilled or take longer to realize, and the dollar's positive momentum diminishes, leading to weakness. Statistics show that, except during financial crisis years, the U.S. dollar index tends to be stronger in election years than the previous year.

On the other hand, Bulgaria is seeking to join the eurozone by 2025, but its economic level is far below that of core members like Germany and France. Such expansion may weaken the overall strength of the eurozone.

### Economic fundamentals comparison: the U.S. has the advantage

From an economic cycle perspective, both the eurozone and the U.S. are on a recovery path, but from different starting points— the eurozone is emerging from recession, while the U.S. has not entered a recession zone, so the U.S. economy is clearly in better shape.

Inflation data further illustrates this. U.S. inflation remains higher than in the eurozone, reflecting that the Fed will be more cautious in cutting rates, and U.S. interest rates are relatively higher. Market research shows that most analysts see a lower risk of a significant rebound in eurozone inflation, implying that the ECB may cut rates faster and more aggressively, putting pressure on the euro.

Manufacturing PMI also slightly favors the U.S., further confirming stronger U.S. economic momentum.

### Central bank policy pace: Euro advantage in the first half, dollar rebound in the second half

This is the most direct driver of exchange rates. Currently, it is expected that the Fed will cut rates by 150 bps in 2024, while the ECB will only cut by 75 bps. At first glance, the dollar should weaken, but in reality, the eurozone may cut more rates this year.

The key is the **timing of rate cuts**. Most economists believe the ECB will start cutting rates in late Q2 (most pointing to June), while the Fed may act as early as March. This means that in the first half of the year, the Fed will lead rate cuts, putting upward pressure on the EUR/USD. In the second half, the ECB will increase rate cuts, and combined with the rising dollar due to election expectations, the situation will reverse.

## 2024 euro trend forecast: a rhythm of rise first, then fall

**First half strategy**: bullish on EUR/USD

The Fed is expected to cut rates in March, while the ECB will wait until June to act. This 3-month "policy misalignment" favors the euro. Technical weekly charts also signal buying, supporting a slight appreciation of the euro in Q1-Q2.

**Second half strategy**: bearish on EUR/USD

As the U.S. presidential race heats up, candidates will continuously propose policies that favor the U.S. economy, leading to short-term overconfidence in the dollar. At the same time, the U.S. may face inflation rebound risks, further strengthening dollar expectations. Monthly technical charts remain neutral, less clear than weekly charts, but the overall probability of decline is higher.

**End of year to early next year**: watch for opportunities to see the euro rebound

Once the election dust settles, the new president's campaign promises face reality, and the market will realize that previous optimistic expectations are hard to fulfill, causing the dollar "bubble" to burst. At this point, the euro may rebound.

## What should investors do?

Step 1: From January to June, focus on a bullish outlook for EUR/USD, capitalizing on the Fed's early rate cuts to benefit from exchange rate appreciation.

Step 2: After June, be alert to turning points. When the Fed pauses rate cuts and the ECB begins large-scale cuts, the euro's advantage will gradually diminish, and a shift to a bearish stance will be necessary.

Step 3: At the end of the year, monitor the election results and how the market digests the "disappointment in reality" logic. This will be the timing to position for a euro rally.

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Overall, the 2024 euro trend forecast is a pattern of **rise first, then decline, with a rebound at year-end**. The Fed's early rate cuts in the first half are the core logic behind euro appreciation, while the election year effects in the second half will completely change the situation. At year-end, caution is needed as optimistic expectations may fall short, leading to a turning point.