06.02.202420:35 Forex Analysis & Reviews: EUR/USD: More factors in favor of downward movement

There is nothing more constant than the temporary. For some, the decline in EUR/USD may seem like a temporary phenomenon. They argue that the downward trend in the USD index remains in force, and the January–February period is witnessing a regular correction. However, Credit Agricole believes that the U.S. dollar will strengthen against the euro throughout the year, explaining this by three reasons: divergence in monetary policy, high demand for safe-haven assets, and a decrease in the attractiveness of the euro due to Quantitative Tightening (QT).

As 2024 started, investors were confident that both the ECB and the Fed would ease monetary policy by 150 bps. Washington was expected to make its move first, positively impacting EUR/USD. However, the current market forecast predicts the first federal funds rate cut in May and deposit rates cut in April. Bloomberg experts believe that Frankfurt will begin monetary expansion either in April or June. The market forecast is more "dovish," and Credit Agricole agrees with it.

Forecasts of Bloomberg experts on the ECB rate

The weaker the economy, the faster inflation will decline. Consumer prices in the eurozone are likely to continue slowing down, while the firmly grounded United States may experience a new surge in CPI and PCE. This is indirectly evidenced by the rise in inflation acceleration expectations from purchasing managers in the services sector.

As a result, the ECB will be tempted to act faster. The Governing Council is currently discussing when to start easing monetary policy. However, it would be wise to consider how low interest rates can go. Their current values are clearly causing significant harm to the eurozone economy.

Dynamics of purchasing managers' expectations for inflation

Simultaneously with the rate cuts, the European Central Bank intends to launch a quantitative tightening (QT) program. Instead of buying bonds, it will start selling them. The outcome will be an expansion of peripheral spreads on eurozone debt obligations, which is perceived as an increase in political risks in the currency bloc. This reduces the attractiveness of the euro and contributes to the decline of EUR/USD.

Finally, let's not forget about the numerous risks facing the global economy. Europe is closer to conflict zones in Ukraine and the Middle East, making the eurozone economy more vulnerable. Meanwhile, demand for safe-haven assets, primarily the U.S. dollar, is growing. Add to this the increased risk of Donald Trump's return to power with his protectionist policies, and the high interest of investors in the "American" easily explains the peak of EUR/USD.

Technically, on the daily chart, the pair is achieving the first target orientation at 1.073 based on previously formed shorts. As long as the pair trades below the lower boundary of the fair value range of 1.078–1.094, the "bears" are in control. In such conditions, it is advisable to stick to the existing strategy of selling EUR/USD, at least towards 1.064.