EUR/USD 2024 Outlook: Will the ECB or Fed Cut More in 2024?

EUR/USD 2023 in Review

Despite some volatility throughout the year, you could say that 2023 was a relatively forgettable year for the world’s most widely traded currency pair.

As of writing in mid-December, EUR/USD is trading up just a couple hundred pips, or about 2%, from the 1.0699 level where it started the year. More to the point, the pair saw a range of just 828 pips across the entire year, the second-lowest range since the inception of the euro in 1999; Using interpolated prices based on the national currencies before that, 2023’s range is the 3rd lowest in the last 50 years!

_{Source: TradingView, StoneX}

The clearest trend in EUR/USD during 2023 was the big Q3 drop from above 1.12 to below 1.05 on the back of the “US Economic Exceptionalism” narrative, or the theme that the world’s largest economy was handily outperforming and decoupling from other developed market rivals. Not surprisingly in retrospect, that theme reversed in Q4 as US economic data slowed down and began to “catch down” to the rest of the world, including the European Continent.

EUR/USD Fundamental Analysis

When it comes to the fundamental outlook for EUR/USD in 2024, the most important theme will be central bank interest rate cuts.

As of writing in the wake of the final central bank meetings of 2023, traders believe that both the US Federal Reserve and European Central Bank have reached peaked interest rates and will be cutting interest rates in the first half of 2024. Of course, forex is a relative game, so the key question for EUR/USD traders will be which central bank cuts interest rates the most, or specifically which cuts interest rates the most relative to expectations.

Conveniently, expectations for both central banks are relatively similar as we flip our calendars to 2024: Traders are pricing in roughly five or six interest rate cuts from both the Fed and the ECB, with the easing cycles projected to begin as soon as March. While much will ultimately depend on how economic data evolves and the temperament of the central bankers in question, basic economic analysis suggests that the odds are skewed toward the more interest rate cuts from the ECB than the Fed, and therefore elevated odds that EUR/USD could fall in 2024.

To keep it as simple as possible, economic growth is likely to be higher and more resilient in the US than in the Eurozone, and inflation, the bogey that both central banks are trying to defeat, should be similar on both sides of the Atlantic over the next year.

Starting with economic growth, the Organization for Economic Cooperation and Development (OECD) projects that the US economy will grow by 1.5% and 1.7% over 2023 and 2024 respectively, roughly in-line with the OECD average. In contrast, Germany, France and Italy, the 3 largest economies in the Eurozone, are all expected to grow by less than 1% in 2024 and by 1.2% in 2025, leaving the entire Eurozone at risk of slipping into a recession if any negative shocks emerge:

_{Source: OECD}

Tackling inflation next, the OECD forecasts that after seeing a later and higher peak in 2022,

price pressures in the Eurozone will move in lockstep with those in the US in a gradual decline toward the central banks’ 2% target:

_{Source: OECD}

Throw in the more Eurozone-proximate risks from ongoing conflicts in the Middle East and Ukraine, and it’s clear that the balance of the risks is tilted toward more potential downside in EUR/USD in 2024, especially in the latter half of the year.

How Will Politics Impact EUR/USD in 2024?

Politics will play an outsized role in how EUR/USD trades in 2024. In the US, November’s presidential election looks likely to be a rematch between incumbent Democratic President Joe Biden and former Republican President Donald Trump, two octogenarians with starkly different political views. Especially though the middle of the year, uncertainty over the eventual winner (not to mention control of the Senate and House of Representatives) may weigh on the US dollar and boost EUR/USD. Broadly speaking, another Trump presidency may be more bullish for the US dollar than four more years of Joe Biden, especially given Mr. Trump’s proposed 10% blanket import tax.

Meanwhile, in the Eurozone, there aren’t any national elections in the largest economies (though notably, there is an EU Parliamentary election in June), but fiscal reforms will be key political factor. The European Union suspended rules limiting national budget deficits and debt loads back in 2020 in the wake of the pandemic and the Ukraine war, but those suspensions are set to expire in 2024.

While there appears to be a general desire for more flexibility relative to the pre-2020 standard, any agreement is still likely to require fiscal tightening (read: smaller government deficits) that could weigh on the economies of some of the more spendthrift nations, prominently including Spain, France, and Italy. With growth expectations for the continent as a whole so low, decreased government spending could be enough to tip several countries back into recession.

EUR/USD Technical Analysis – EUR/USD Weekly Chart

_{Source: TradingView, StoneX}

From a technical perspective, EUR/USD sits not only near the middle of its 2023 range, but also its 3-year range as we enter 2024. After a year of consolidation, the odds of a stronger trend and more volatility in 2024 have increased, but with no clear technical trend and tremendous uncertainty about the timing and quantity of interest rate cuts on both sides of the Atlantic, readers may want to wait for prices to break out one way or another before committing too strongly.

In terms of the key levels to watch, the 2023 range between 1.0500 and 1.1250 will be key. A bullish breakout above 1.1250 would expose the January/February 2022 highs in the 1.1500 area, followed by the 78.6% Fibonacci retracement of the whole 2021-2022 drop around 1.1750. Meanwhile, a bearish breakout below 1.0500 support could, in turn, have bears targeting the retracements of the 2022-2023 rally at 1.0200 (61.8%) and 0.9900 (78.6%), as well as the psychologically significant parity level at 1.00.

Written by Matt Weller, Global Head of Research.

Follow Matt on X: @MWellerFX