2024 Euro Trend Forecast: Key Logic Behind the Exchange Rate's Rise and Fall

A Review of 2023 and the Basis for 2024 Euro Trend Forecast

The performance of the euro against the US dollar in 2023 was not as strong as expected, with only a 0.36% increase. Behind this relatively flat performance lies a complex policy game—differences in the rate hike pace between the US and European central banks and economic divergence.

Since the beginning of 2024, market dynamics have shifted. The key to euro trend forecasting is understanding why, in Q4 last year, the market anticipated a rate cut by the Fed first, which actually boosted the euro’s position against the dollar, whereas this year, the trend has turned downward.

According to MacroMicro data, US Treasury yields and German government bond yields have both risen following recent policy signals, reflecting a reassessment of the pace of rate cuts by the two major central banks.

Three Major Drivers Determining the Euro-Dollar Trend in 2024

Geopolitics and Election Year Effects

A core risk in 2024 is the US presidential election. Historical experience shows that the dollar tends to perform strongly during election years, but this strength is not evenly distributed throughout the year.

Looking back at 2016, the year Trump won: the euro/dollar was mostly in a downtrend. However, after Trump’s victory on November 8, the exchange rate initially accelerated its decline, then strengthened throughout 2017. The logic behind this pattern is—during elections, candidates propose economic policies that are market-friendly, leading to a one-sided bullish expectation for the dollar. But once the election results are finalized and the difficulty of implementation becomes apparent, these overly optimistic expectations are corrected.

Statistical data shows that, excluding financial crisis years, the US dollar index tends to be stronger in election years than the previous year.

Another factor to watch is the expansion of the eurozone. Bulgaria is seeking to join the eurozone in 2025, but its economic level is significantly below core members like Germany and France. The accession of such countries could weaken the overall economic resilience of the eurozone, potentially acting as a bearish factor for the euro exchange rate.

Real Comparison of Economic Fundamentals

From an economic cycle perspective, data as of December 2023 shows both the US and eurozone are showing signs of recovery, but in different directions: the eurozone is recovering from a recession, while the US has never entered a recession zone. This indicates that the US economy is leading the eurozone in overall outlook.

Differences in inflation data are also crucial. US inflation remains higher than in the eurozone, which limits the scope for central bank policy easing. The Fed may reduce rate hikes less frequently due to sticky inflation, keeping US interest rates relatively high. Recent Reuters surveys show that among 38 analysts, 26 believe the risk of a significant rebound in eurozone inflation in the next six months is low, further indicating that the eurozone may face a faster rate cut cycle.

Manufacturing performance is also diverging. PMI data shows US manufacturing is slightly stronger than in the eurozone, reflecting different demand dynamics.

Clear Contrast in Central Bank Policy Paces

Current expectations suggest the Fed will cut rates by 150 bps in 2024, while the European Central Bank (ECB) is expected to cut by 75 bps. On the surface, this favors the euro (smaller rate cut), but the key market factor is the timing of rate cuts.

According to Reuters surveys of economists:

• Out of 62 respondents, 38 expect the ECB to cut rates for the first time in late Q2 (with 6 months, 21 in April, and 17 in June)
• The probability of the Fed first cutting rates in March exceeds 50%

This implies that in the first half of the year, the Fed’s rate cut pace may lead the ECB’s, supporting a relatively strong euro. However, as economic data evolves, the overall difference in rate cut scales may narrow.

The Three-Stage Logic of the 2024 Euro Trend Forecast

First Half: A Window for Slight Euro Appreciation against the US Dollar

In Q1 to Q2, the market still expects the Fed to start rate cuts earlier than the ECB. During this policy timing gap, the euro should have room to appreciate. Technical weekly signals also support this view.

Investors can maintain a bullish strategy on EUR/USD during this phase.

Second Half: US Dollar Rebound Opportunity Amid Election Expectations

In the second half, US election campaigns will intensify. Candidates’ promises often exceed what economic fundamentals can support, leading to short-term over-optimism for the dollar.

Meanwhile, there is also a risk of inflation rebound in the US during this period, which would further delay the Fed’s rate cuts and support the dollar. During this phase, downward pressure on EUR/USD will increase significantly, and investors should shift to bearish strategies.

The expected decline in the second half may surpass the gains of the first half.

End of Year to Early Next Year: Watch for Reversal After Disillusionment

After the election results are finalized, the promises made during the campaign are unlikely to be fully fulfilled, and the market will start trading on the premise that expectations will fall short. The dollar, having exhausted its positive momentum, will face adjustments, creating a new upward opportunity for EUR/USD.

Investors should start positioning for a bullish euro from the end of the year.

Practical Investment Strategies for the 2024 Euro Trend Forecast

Based on the above multi-angle analysis, the specific strategies for euro trend prediction can be summarized into three stages:

Stage 1 (First half of the year): During the period when the Fed begins rate cuts ahead of the ECB, it is recommended to adopt a bullish EUR/USD stance. The expectation is that the Fed will cut rates in March, while the ECB will delay until June, creating a 2-3 month policy gap that supports euro appreciation.

Stage 2 (Second half of the year): As the election campaign heats up, market optimism for the dollar will be high, and inflation rebound risks will emerge. It is advisable to switch to a bearish EUR/USD stance. The downward move in this phase is expected to be larger than the upward move in the first half.

Stage 3 (End of year to early next year): After the election dust settles and policy promises are not fully realized, the dollar’s positive momentum will wane, and it will start to weaken. It is recommended to pre-position for a long-term bullish euro to prepare for a new rally.

Summary

Starting from the basis of the 2023 euro trend forecast, the 2024 EUR/USD trend will follow a “rise, fall, then rise” three-phase pattern. The policy timing gap in the first half supports the euro, the US election year rebound is the main theme in the second half, and policy revisions at year-end set the stage for a euro rebound next year.

Investors need to closely monitor the policy moves of the Fed and ECB, US election developments, and inflation data changes, adjusting strategies dynamically to seize trading opportunities in each phase.