2024 Euro Trend Forecast: Interpretation of the Investment Logic of Rising First, Then Falling

Year-over-Year Comparison: Why Did the Euro Reverse Its Trend in 2024?

In 2023, the euro appreciated by 0.36% against the US dollar throughout the year, but since 2024, it has faced downward pressure. The core reason behind this is the misalignment in the pace of rate cuts between the US and European central banks. The Federal Reserve initiated rate cut expectations first, which pushed the euro higher in Q4 last year, but this year, the economic divergence and policy divergence between the US and Europe have begun to dominate.

In 2023, both the US and Europe were in a rate hike cycle, and the euro’s volatility against the dollar was mainly driven by differences in the pace of rate hikes. But now, the situation has changed. The US economy remains relatively resilient, while the Eurozone faces more downside risks. This necessitates a reassessment of the euro’s outlook for 2024.

Three Core Factors Determining the Euro’s Outlook

Political Events: The US Election Year and Dollar Cycle

The 2024 US presidential election will be the most significant political variable of the year. Historical experience shows that election years tend to release policy signals favorable to the US economy from candidates and parties, leading to market optimism about the dollar and a relatively strong dollar.

However, this optimism is often short-lived. In 2016, the year Trump won, the euro-dollar exchange rate declined most of the time before the election, and after Trump’s victory on November 8, it accelerated its decline. Subsequently, in 2017, some promises were hard to fulfill, and the dollar’s rally exhausted, causing the exchange rate to reverse upward.

Statistics show that, except during financial crisis years, the US dollar index tends to be stronger in election years than the previous year. This suggests that in the first half of the year, the dollar may be supported by election expectations, but in the second half, investors should be cautious of a reversal if optimism fades.

On the other hand, Bulgaria’s pursuit of joining the Eurozone by 2025 may weaken the overall economic level of the Eurozone, as its per capita GDP is significantly lower than core members like Germany and France, which could be detrimental to the euro in the long term.

Economic Fundamentals: US Leading the Eurozone’s Recovery

From an economic cycle perspective, the Eurozone is transitioning from recession to recovery, while the US has not fallen into recession, with overall economic momentum clearly stronger than that of the Eurozone. This fundamental advantage typically supports US dollar appreciation.

Inflation data is a key differentiator. US inflation remains higher than in the Eurozone, reflecting limited room for Fed rate cuts, and the real US interest rate is relatively higher. According to recent surveys, 26 out of 38 analysts believe the risk of Eurozone inflation rebounding in the next six months is low, implying that the Eurozone’s central bank may accelerate rate cuts, which is unfavorable for the euro.

In manufacturing, US PMI is also slightly stronger than that of the Eurozone, reaffirming the US economy’s relative strength.

Central Bank Policies: The Battle of Rate Cut Magnitudes and Paces

The Fed is expected to cut rates by 150 basis points in 2024, while the European Central Bank (ECB) is expected to cut only 75 basis points. Although a larger rate cut in the US should be bearish for the dollar on the surface, the pace of rate cuts is often more important than the magnitude.

According to Reuters surveys, about 73% of economists expect the ECB to cut rates for the first time by the end of Q2, with 62.7% expecting this to happen in June. The Fed’s first rate cut is likely to occur in March. This means that in the first half of the year, the Fed will lead the ECB in rate cuts, putting short-term pressure on the dollar and supporting the euro.

However, from a full-year perspective, the ECB may cut rates more quickly and more extensively, which could become a downward driver for the euro in the second half.

Short-term and Mid-term Outlook

First Half: Slight Euro Appreciation Opportunity

In Q1 and Q2, there is a higher probability of a slight upward movement of the euro against the dollar. The main logic is that the Fed’s first rate cut (expected in March) will occur before the ECB’s (expected in June), and the market has not yet fully priced in the election risk, so the dollar lacks upward momentum for now.

Technical analysis supports this view, with buy signals appearing on a weekly basis. Investors can moderately favor the euro’s performance against the dollar during this period.

Second Half: Euro Facing Downward Pressure

Entering the second half, the US election race will intensify, with candidates projecting overly optimistic economic prospects, boosting market optimism and pushing the dollar higher. Meanwhile, the US may face rising inflation risks, further supporting the dollar.

Monthly technical indicators are neutral, weaker than weekly signals, suggesting that the trend in the second half is less clear than in the first half, but the overall direction tends to favor euro depreciation.

More importantly, economists generally expect the ECB to cut rates more significantly this year, with cumulative cuts possibly reaching 75-100 bps, which will noticeably lower real interest rates in the Eurozone and be bearish for the euro.

Overall, the euro’s decline in the second half is expected to be larger than the first half’s appreciation, and the annual trend may still show a downward trajectory.

Investment Strategy in Practice

Based on the above analysis, investors can consider the following strategies:

Q1 to Q2 Strategy: Bullish on the euro against the dollar. The Fed’s rate cut in March (expected) will precede the ECB’s in June, supporting the euro. Additionally, before the election, the dollar lacks strong support, making this window relatively favorable.

Q3 to Q4 Strategy: Bearish on the euro against the dollar. The election enters its final phase, with optimism boosting the dollar; meanwhile, the ECB continues to cut rates, lowering real interest rates in the euro area. The combination of these factors will put pressure on the euro.

Year-end to Next Year Strategy: Watch for bullish opportunities in the euro. After the election, the market begins to unwind overly optimistic expectations, and the dollar loses support and weakens. The new president may fulfill some campaign promises but will struggle to deliver all, exhausting dollar bullishness, and the euro is likely to rebound.

Summary

The euro’s outlook for 2024 is characterized by a “rise first, then decline” pattern. In the first half, driven by the Fed’s leading rate cuts, the euro against the dollar may see modest appreciation; in the second half, optimism about the US election and the ECB’s accelerated rate cuts will exert downward pressure. The overall tone remains weak, but not a one-way decline. Properly timing the transitions at each stage is the key to an optimal strategy.