From 1.20 to parity. The euro started 2024 from the $1.10 mark after an impressive 5.6% rise in the fourth quarter. Among the bulls on EUR/USD, there was euphoria associated with expectations of 6-7 rate cuts by the Federal Reserve. It was believed that the ECB would follow the Fed, making the U.S. dollar extremely vulnerable. Bloomberg experts put the consensus estimate for the main currency pair at 1.15 by the end of December, but many believed it would reach 1.20. Only three months have passed and the situation has turned upside down.
After the release of data on U.S. inflation for March, major banks and investment companies began to revise their forecasts for the fate of the federal funds rate. For example, BNP Paribas believes it will be cut only twice instead of the previously forecasted three times. Most share this view, but some go even further. One of the world's largest asset managers, PIMCO, believes that the Fed may resume its tightening monetary policy cycle if prices in the U.S. continue to accelerate.
Instead of 6-7 acts of monetary expansion, the futures market now forecasts a decrease in borrowing costs by only 40 basis points in 2024. At the same time, the ECB is expected to sharply lower deposit rates by 75 basis points. Bank of Greece Governor Yannis Stournaras believes it could fall by as much as 100 basis points this year, and it's time for the ECB and the Fed to part ways.
Dynamics of Market Expectations for Central Bank Rates
According to a member of the Executive Board, the situation in the U.S. and the Eurozone is fundamentally different. American consumer demand is much stronger than European, primarily due to fiscal stimulus. This exacerbates the risks of inflation divergence. In the Eurozone, on the contrary, price increases are driven by supply shocks, and there is no such danger of CPI returning to growth as in the States.
Indeed, in a strong economy, there cannot be weak inflation, and the U.S. economy stands firmly on its feet, unlike the Eurozone. It's no wonder that Bank of America, ING, and German LBBW do not rule out the possibility of EURUSD returning to parity. According to ING, this is likely in the event of extreme divergence in the monetary policies of the Fed and the ECB.
Inflation Dynamics in the USA and the Eurozone
In any case, as long as there is divergence in economic growth between the U.S. and the Eurozone, and the futures market continues to signal three to four acts of monetary expansion by the European Central Bank compared to two for the Fed in 2024, there is a high probability of the main currency pair returning to the trading range of 1.00-1.05.
Technically, on the daily chart, EUR/USD is experiencing a recovery of the downward trend. The harmonic trading pattern AB=CD indicates a clear target for the bears at 1.05, where its target orientation is at 161.8%. The selling strategy remains relevant. Breakdowns of support at 1.063 and rebounds towards 1.070 with subsequent formation of reversal patterns are suitable for adding short positions.
