EURUSD at 1.07 in the First Quarter of 2024

Yesterday marked a rather uneventful day in FX market, mirroring the sentiment shared by many market participants. The anticipation was palpable as we collectively awaited the release of crucial inflation data from the United States, scheduled for tomorrow. This data, positioned as the highlight of the week, loomed large over market dynamics, potentially casting a shadow on risk appetite. This phenomenon is particularly notable in the early stages of the calendar year, where market participants are eager to set a positive tone for their profit and loss (P&L) books.

Economic Calendar

Source: Finlogix

The prevailing market mood leaned decisively towards risk aversion, contributing to the ascent of the US dollar. Interestingly, this upward trajectory persisted despite a marginal decline in US Treasury (UST) bond yields in comparison to their counterparts in the euro-zone. Core yields in the euro-zone, however, registered an uptick for the day.

As alluded to earlier, my assessment suggests that the EUR/USD rate may have overstretched to the upside during the US dollar sell-off towards the close of 2023. The prospect of a realignment of spot to relative short-term rate levels implies a potential drift in EUR/USD towards the 1.0700-level. These narrative gains strength when considering the global market's inclination towards risk-off, a phenomenon that aids in the gradual recovery of the US dollar. Despite the minor dip in UST bond yields, global equity markets experienced a remarkable surge last year, with the S&P 500 recording an impressive 24% gain. This robust performance, concentrated in the final two months of the year, sets the stage for what could be a challenging commencement to 2024. The associated gains also raise concerns about valuation metrics, hinting at potential hurdles for further upward momentum.

In line with this perspective, the latest 'Global Economic Prospects' report from the World Bank, released yesterday, supports the notion of a gloomy global growth backdrop. According to their 2024 forecast, the anticipated 5-year growth run is poised to be the most dismal since the early 1990s. Indermit Gill, Chief Economist at the World Bank, underscored the necessity for a "major course correction" to avoid squandering opportunities in the 2020s. The forecast indicates a deceleration in global GDP from 2.6% in 2023 to 2.4% this year. The projected 2020-24 average growth rate, at 2.2%, would be the weakest since 1990-94—a period encompassing a US recession, the Gulf War, currency crises, recessions in Europe, and the Mexican peso crisis.

Of course, the current subdued trading atmosphere, contributing to the gradual reversion of US dollar selling witnessed last year, remains subject to change.

The catalyst for potential shifts lies in the imminent release of the latest Consumer Price Index (CPI) data from the US. Any significant divergence—be it stronger or weaker than consensus—promises to inject volatility into the markets. With market expectations pricing in a 60% likelihood of a rate cut in March, there exists ample room for rates move in either direction. However, my analysis, highlighting an overshoot of EUR/USD spot relative to rates spread, leans towards a higher likelihood of US dollar strength in response to robust data, as opposed to weakness stemming from disappointing economic indicators.

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