Forecast: What to Expect from the Euro and Dollar in 2024
Traditionally, we publish currency forecasts from leading global financial institutions at the turn of the outgoing and incoming years. Having maintained this practice for several years, it enables us to not only peer into the future but also to reflect on past predictions by experts and evaluate their accuracy.
2022: The Beginning
Just as the world had adapted to living under coronavirus-induced quarantine conditions, war entered the planet's life. Russia's armed invasion of Ukraine in February 2022 and the ensuing anti-Russian sanctions exacerbated economic problems and spurred inflation growth in many countries, even those far from this region.
The proximity of EU countries to the conflict zone, their strong dependence on Russian natural energy resources, the nuclear threat, and the risks of the conflict spreading to their territories dealt a serious blow to the Eurozone economy. In such circumstances, the European Central Bank (ECB) had to act with utmost caution to avoid a complete collapse. The United States found itself in a significantly more advantageous position, which allowed the Federal Reserve, aiming to reduce inflationary pressure, to begin a cycle of interest rate hikes on March 16. This acted as a catalyst for the strengthening of the dollar, and on July 14, EUR/USD fell below the parity line of 1.0000 for the first time in 20 years, reaching a low of 0.9535 on September 28. In mid-July, the European Central Bank also began to gradually increase the euro rate. As a result, EUR/USD entered the new year, 2023, at a level of 1.0700.
2023: Whose Forecasts Proved More Accurate
The coronavirus pandemic began to subside, and on May 5, the WHO declared that COVID-19 was no longer a global emergency. Gradually, various countries started to relax quarantine restrictions. The military actions in Ukraine turned into a prolonged conflict. The fight against inflation slowly started showing signs of success, and the economy managed to adapt to rising interest rates and high energy prices. A global catastrophe was averted, and voices predicting a soft landing, especially for the U.S. economy and possibly the Eurozone, grew louder.
In 2022, the maximum range of fluctuations for EUR/USD exceeded 1,700 points, but in 2023, this figure was halved to 828 points. The pair reached its peak on July 18, climbing to 1.1275. It found its bottom at 1.0447 on October 3 and is ending December in the 1.0900-1.1000 range (as of the writing of this review), not far from the January values.
So, what forecasts did experts give for 2023? The furthest from reality was the forecast by Internationale Nederlanden Groep. ING was confident that all the pressure factors of 2022 would persist into 2023. High energy prices would continue to heavily burden the European economy. Additional pressure would come if the U.S. Federal Reserve halted its printing press before the ECB. According to analysts from this major Dutch banking group, a rate of 0.9500 euros per dollar was expected in Q1 2023, which could then rise, reaching parity at 1.0000 in Q4.
The Agency for Economic Forecasting's experts were accurate regarding the EUR/USD dynamics in Q1: they predicted a rise to 1.1160 (in reality, it rose to 1.1033). However, they expected the pair to then undergo a steady decline, reaching 1.0050 by the end of Q3 and finishing the year at 0.9790. Here, they were significantly mistaken.
But it wasn't just the bears who were wrong; the bulls on the euro/dollar pair also erred. For example, the French financial conglomerate Societe Generale voted for a weakening dollar and a rising pair. However, their forecast of a climb above 1.1500 by the end of Q1 was too radical. Strategists at Deutsche Bank allowed for fluctuations in the 1.0800-1.1500 range. However, in their view, the pair's rise to the upper limit was only possible if the Fed began to ease its monetary policy in the second half of 2023. (We now know that no easing occurred, but the rate was frozen at 5.50% from July onwards).
The most accurate predictions came from Bank of America and the German Commerzbank. According to Bank of America's base scenario, the U.S. dollar was expected to remain strong in early 2023 and then start to gradually weaken, leading the EUR/USD pair to rise to 1.1000 after the Fed's pause. Commerzbank supported this scenario, stating, "Considering the expected change in the Fed's interest rate and assuming that the ECB refrains from lowering interest rates [...], our target price for EUR/USD for 2023 is 1.1000," was the verdict of strategists from this banking conglomerate.
2024: What to Expect in the New Year
What awaits the euro and dollar in the upcoming year of 2024? It's important to note that forecasts vary significantly due to the numerous "surprises" life has presented recently and the many unresolved issues it has left for the future. Questions remain about the geopolitical situation, the direction and pace of the monetary policies of the Federal Reserve (Fed) and the European Central Bank (ECB), the state of the economy and labour markets, the extent to which inflation and energy prices can be controlled, who will be elected President of the United States in November, the outcomes of Russia's war in Ukraine and the ongoing conflict between Israel and Hamas, and the balance of power in the U.S.-China rivalry. The answers to these and other questions are yet to be discovered. With many factors of uncertainty, experts have not reached a consensus.
Recent dovish remarks by Fed Chair Jerome Powell and moderately hawkish statements by ECB President Christine Lagarde have led markets to believe that the Fed will lead in easing monetary policy and lowering interest rates in 2024. If the market does not receive a countersignal, the U.S. dollar will remain under pressure. Societe Generale believes the Dollar Index (DXY) could drop from the current 102.50 to below 100, possibly as low as 97 points. A Reuters poll of analysts also indicates that the U.S. dollar should weaken in the coming year. An Investing.com review suggests that EUR/USD could potentially reach 1.1500, subject to various geopolitical and macroeconomic conditions.
According to the base scenario outlined by UBS Wealth Management, a slowdown in U.S. economic growth, falling inflation, and expectations of lower interest rates should support stocks and bonds. Regarding the EUR/USD pair, UBS sees it at a level of 1.1200. German Commerzbank's forecasts also include a peak of 1.1200. Analysts there expect a temporary strengthening of the euro against the dollar before a subsequent weakening. They anticipate the rate will rise to 1.1200 by June 2024, then decrease to 1.0800 by March 2025.
ING economists calculate that in the second half of 2024, the EUR/USD rate will still be rising towards 1.1800. However, they caution that this forecast is based solely on the possible trajectory of Fed and ECB policies. They note, "The rate differential is not the only factor determining the EUR/USD course." Low growth rates in the Eurozone and political uncertainty regarding the reintroduction of the Stability and Growth Pact suggest that EUR/USD will end this year close to 1.0600, with its peak levels in 2024 closer to 1.1500 than to 1.1800.
Fidelity International, JPMorgan, and HSBC economists do not rule out a scenario where other regulators, such as the ECB and the Bank of England, might take the lead in easing ahead of the Fed.
Goldman Sachs strategists believe that while the dollar's prospects may worsen in 2024, the strong and stable U.S. economy will limit the fall of the currency. They write that the dollar is still highly valued, and investors lean towards it, which will remain "strong for a long time," and any decline will be insignificant. The U.S. economy is too strong to cause a rate cut of a full 150 basis points in 2024.
Danske Bank, Westpac, and HSBC also believe that by the end of 2024, the dollar will strengthen against the euro and the British pound. ABN Amro's forecast for the end of next year suggests a rate of 1.0500, and the Agency for Economic Forecasting predicts 1.0230.
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The ancient Chinese military treatise "The Thirty-Six Stratagems" states, "He who tries to foresee everything loses vigilance." Indeed, it is impossible to foresee everything. But one thing can be said for sure: the upcoming twelve months, like the previous ones, will be full of unexpected surprises. So, remain vigilant, and fortune will be on your side.
Happy upcoming New Year 2024! It promises to be very interesting.
NordFX Analytical Group
Notice: These materials are not investment recommendations or guidelines for working in financial markets and are intended for informational purposes only. Trading in financial markets is risky and can result in a complete loss of deposited funds.
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