Is 1.07 the Real Bottom for EURUSD in 2024?

The EUR and the USD are moving in different directions lately. People are changing their views on how the ECB and the Fed will handle things. This shift is seen in the drop of rates between EUR and USD.

The changes in the FX and rates markets are because the US has stronger-than-expected inflation and job market numbers (I’ve wrote a blog on this topic here), while Europe's data isn't as good. US investors now think the Fed won't make things easier until June. On the other hand, European investors still think there's a good chance the ECB will cut rates in April.

Looking at what's happening in the markets, it seems like most of the bad news for EUR/USD is already priced in. The exchange rate is still lower than what it should be based on certain factors. Also, there's some hope for Europe's future economic outlook, as recent data is showing improvement.

This week, the market participants will be pay attention to more data, like the February Purchasing Managers' Index (PMIs) and the German IFO. Investors in EUR will also be watching the ECB's info on negotiated wage rates. If the data shows things are getting better in Europe, the Euro's outlook might improve, and EUR/USD could stabilize at higher levels, suggesting the worst economic times might be behind us.

EUR/USD vs EUR-USD Nominal Rate Spread

 Source: MacroMicro Talking about the USD, I find it grappling with the constraints of its perceived exceptionalism. Recent positive releases in labour, activity, and inflation data have led FX investors to contemplate a scenario where the US might avoid a significant economic downturn. In this scenario, a less intense Fed easing cycle in 2024 and 2025, coupled with a prolonged pause as inflation subsides while the real economy stays robust, could provide support to the USD. This support would come through increased US rates, UST yields, and inflows from foreign portfolios.

While many view this as reinforcing the concept of 'USD exceptionalism,' the ability of the USD to thrive on both attractive interest rates and its safe-haven status during times of heightened risk aversion, Credit Agricole acknowledge there are limits to this exceptionalism. This is particularly true as expectations of continued Fed easing persist, influencing overall risk sentiment – Says Credit Agricole Analysts. 

The factors contributing to the current resilience of the US economy and persistent inflation, such as tight labour markets, relatively loose fiscal policies, and accommodating financial conditions, may not be exclusive to the US. These factors could potentially contribute to recovery in other parts of the world, especially in economies dependent on commodity exports. If global growth improves and supply constraints continue, these commodity exporters might experience a boost in terms of trade.

Looking ahead, global attention turns to the February Purchasing Managers' Index (PMIs) from around the world as investors seek indications that the worst of the recent global growth downturn is behind us. Confirmation of this view could bolster risk sentiment and emphasize the limitations of USD exceptionalism. Additionally, speeches by key figures from the Fed and the minutes from the January FOMC policy meeting will be closely watched. Amid the absence of significant positive US data surprises or hawkish statements, the USD may face some weakening, particularly against currencies linked to risk appetite.

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