Euro-Dollar outlook 2024: Navigating political and economic challenges

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Over the course of 2024, the euro faces a complex landscape marked by political changes and economic challenges. Key events include parliamentary and presidential elections in several Eurozone countries, while challenges include global conflicts, fiscal tightening and inflation concerns.

ANNOUNCEMENT

After enduring two consecutive years of depreciation, the euro recovered in 2023, boasting a 3% gain against the dollar. As we enter 2024, the single currency faces a landscape full of economic and political events, along with challenges that could shape its trajectory in the coming months.

Political elections and changing dynamics

2024 is full of significant political events across the Eurozone. Austria, Belgium, Croatia, Lithuania, Portugal and Slovakia are preparing for major parliamentary or presidential elections.

All eyes, however, are on the next European Parliament elections which will be held from 6 to 9 June 2024. The renewal of 705 MEPs European Parliament is poised to provoke changes at the highest levels of the European Commission and the European Council, with the potential for the introduction of new policy initiatives impacting the euro.

Future challenges: from global conflicts to fiscal tightening

The Eurozone’s path is fraught with challenges arising from ongoing international conflicts, particularly in Ukraine and the Israel-Gaza strip. Domestically, the bloc also faces economic tests, particularly regarding the EU budget and the green transition imperative.

Tax policies in member states are set to tighten in 2024. The European Commission expects a reduction in energy support measures, which will have a significant impact on fiscal policy.

The German question”debt brakewill be crucial, especially after the German Constitutional Court declared a significant part of the government’s financing plan for climate and energy programs illegal in November 2023, resulting in a 60 billion euro deficit in the nation’s public finances.

This debate has divided economists. According to a recent poll by Ifo and FAZ, some support reforming or abolishing the debt brake to better facilitate green investments, while almost half support maintaining it to ensure fiscal stability.

Economic and political outlook: slowing inflation and rate cuts on the horizon

On the economic front, after a robust post-pandemic recovery led by services, growth momentum has slowed due to rising costs of living, weak external demand and the effects of tighter monetary policy. Inflation is expected to continue to decline, although phasing out could slow the decline in price pressures.

Regarding monetary policy, the European Central Bank (ECB) kept key interest rates unchanged in December, signaling the potential end of its tightening cycle.

However, unlike Federal Reserve Chair Jerome Powell, ECB President Christine Lagarde has stressed the need to remain vigilant, arguing that now is not the time to “let our guard down” on interest rates.

The market expects around seven 25 basis point rate cuts by the ECB in 2024.

Eurodollar projections: different perspectives from major banks

ING Group has a bullish view on the euro, predicting it will rise to 1.15 against the dollar due to the slowing US economy leading to Fed interest rate cuts. However, it acknowledges that weak Eurozone growth could lead the ECB to cut rates together with the Fed, limiting the appreciation of the euro.

Bank of America also expects the EUR/USD exchange rate to reach 1.15 by the end of 2024. Despite expectations of weak Eurozone growth, the currency pair is expected to strengthen due to Fed rate cuts. The euro-dollar exchange rate is estimated to be undervalued by about 15%.

By contrast, US investment bank Citigroup expects continued economic weakness in Europe, driven by slowing consumption and reduced fiscal stimulus. He maintains a forecast of 1.02 for the EUR/USD pair over the next 6-12 months.

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